What is a Credit Note in GST and When is it Issued?

A credit note in GST is mandatory for any GST registered supplier of goods or services. As a supplier, when you file your returns for the month, you should also mention details of any credit notes in GST issued during the month. The tax liability will be adjusted accordingly. 

The issuance of the credit note can allow you as a supplier to decrease your tax liability in the returns without requiring you to undertake any tedious process of refunds.

What is a Credit Note in GST?

A credit note in GST, also known as a credit memo, is a document issued by the supplier, signifying a full or partial return of funds. If the recipient returns goods, the shipment of products is inaccurate or damaged, or an invoicing problem occurs, a credit note is sent.

For example, Firm A is the seller, and Firm B is the buyer. Due to defective products being received, Firm B returns the goods to Firm A. Firm A will verify the items to confirm the defects and then issue a credit note to Firm B against the original invoice. This credit note can be used by Firm B for making more purchases from Firm A in the future and/or a refund amount may also be mutually decided upon. 

To correct such irregularities, the supplier issues the credit note to the recipient and once issued, the suppliers’ tax liability will reduce correspondingly.

Format of Credit Note in GST

While there is no prescribed format for a credit note under GST, there are certain items that must be included in one, which is as follows:

1. The name, address, and GSTIN (Goods and Services Tax Identification Number) of the supplier
2. Nature and type of document
3. A unique consecutive serial number having

• At most, 16 characters
• One or multiple series
• Numerals and/or alphabets and/or special characters such as hyphens or dashes.

4. The date of issue 
5. Personal Information

• Name, address, and GSTIN or Unique Identification Number (in case of foreign embassies and special persons who aren’t issued GSTIN) in case of a registered recipient.
• The name, address of the recipient, and the delivery address, along with the name of the State and its code, need to be given if the recipient is unregistered.

6. Date of the corresponding tax invoice, its serial number or the bill of supply
7. The value of taxable supply of goods/services, the tax rate and amount credited to the recipient
8. The supplier’s signature or digital signature or their authorized representative must be there.

Also Read: How To File GSTR-9 And What Is The Penalty For Late Filing?

When is a Credit Note in GST issued?

Under Section 34(1) of the CGST act 2017, a credit note is defined as a document that is issued by the supplier of goods/services to the recipient when:

a. The issued tax invoice has charged a tax amount that is more than the amount that should be payable due to such supply.

b. The receiver returns the supplied goods

c. The supplied goods/services turn out to be deficient

In any of the cases mentioned above, the recipient may receive a credit note under GST issued by the registered supplier of goods or services.

Procedure for Issuing a Credit Note in GST

Word, Excel, or any other program that the organization uses to make invoices can be utilized to create a credit note. The steps for this are as follows:

Step 1: Select the credit note template that you wish to use

Step 2: Insert the company’s logo

Step 3: Enter the credit note’s unique credit note number and the date of issue.

Step 4: Enter the details of the invoice and the reference number to which the credit note is issued.

Step 5: Put the GSTIN of the supplier and customer in addition to the supply location

Step 6: Save the credit note

Details of any credit notes in GST issued during the month should be included in the supplier’s monthly returns. Their tax obligation will be adjusted as necessary. It should be noted that if the tax and interest from a transaction are transferred to another registered person, the supplier will not be permitted to reduce the output tax liability for that transaction.

Details of Credit Note to be Filed in GST Returns

All taxpayers must provide information about all credit notes they issued during the preceding month in GSTR 1 filing, following the procedure mentioned above.

Along with the data of the original invoice number, invoice date, and customer’s GSTIN, the details of credit notes that were issued and amended over the previous month must be provided. Credit note in GST issued over the span of one financial year must all be filed no later than September of the year after it ends or on the day the GST annual return is due, whichever is earlier.

How to Adjust Tax Liability in case of Credit Note in GST?

The credit note in GST that has been issued by the supplier must contain all the details relating to the transaction. The return for the month in which this credit note has been issued should not be done later than September following the end of the financial year in which the supply was made or the date of furnishing the corresponding annual return, whichever is earlier. 

Hence, it is not possible to reduce the output tax liability when the credit note in GST is issued after September. Once the credit note is issued and matched, the output tax liability of the supplier is reduced. The credit note needs to match with the following to reduce the tax liability of the supplier:

• The buyer’s tax return has the same input tax credit claim reduction for the same or following tax period.
• Claim duplication to reduce the output tax liability

When the claim for output tax liability reduction matches the reduction in the relevant input tax credit claim by the buyer, it shall be finalized and communicated to the supplier. It should be noted that if the incidence of tax and interest from a transaction is shifted to another registered person, the supplier will not be permitted to reduce the output tax liability for that transaction. 

Suppose the reduction of output tax liability exceeds the claim amount for an input tax credit, or the recipient has not declared the credit note in their returns. In that case, the disparity must be conveyed to both parties. On the other hand, if the claim for reduction in output tax liability is duplicated, then the supplier must be communicated to. 

If the discrepancy is communicated to the buyer and if they don’t rectify it for the return of that month in which the discrepancy was communicated, then, it will be added to the supplier’s output tax liability in the return for the succeeding month. In case of duplication or reduction in output tax liability, the amount shall be added to the supplier’s output tax liability in the return for the month in which the duplication was communicated.

Also Read: What Is GST On Personal Loans and How Does It Impact Borrowers?

Final Word

Credit note in GST is a practical and convenient way for the supplier to change or update the value of the products or services listed on the original tax invoice if the goods are returned by the recipient, the shipment of products is inaccurate or damaged, or an invoicing problem in terms of the tax paid occurs. The supplier will not have to go through the hassle of tedious refund procedures thanks to the issuance of the credit note, which will readily enable him to lower his tax liability in their returns.  

It must be noted that the records of the credit note must be retained for 72 months after the annual return filing deadline for the year that the accounts and records belong. If such accounts and documents are maintained manually, they must be preserved at each associated location listed in the certificate of registration, and if they are maintained digitally, they must be accessible at each related location.

FAQs on Credit Note in GST

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.