All About Credit Notes

Monisha Chaudhary

30 Mar, 2024

Issue of tax invoice is mandatory for a GST-registered supplier of goods or services. However, if a circumstance arises during the business, there is a reduction in taxable supply value, then the supplier issues a credit note or credit memo or credit memorandum or credit invoice. A credit note is a document issued by one party to another mentioning that the sender credits the other party’s account in his books. If, after the issue of the tax invoice, there is any reduction in the taxable value of goods supplied, then a credit note may be issued mentioning the prescribed particulars. It is not a refund but a replacement for a refund wherein the customer can buy products later without paying for them. The seller issues a credit note in the form of an acknowledgement of the debit note raised by the buyer. A debit note reduces the buyer’s liability.

Reasons for the issue of a credit note

Section 34 (1) of the CGST Act, 2017 states that a credit note is issued when there is a requirement to reduce the tax liability mentioned in the tax invoice. Some of the common reasons for issue of a credit note are:

1. When the sales is returned by the buyer due to quality issues, services rejection or damaged goods receipt.
2. When erroneously higher charges are collected from the buyer, or the buyer paid amount is more than the invoiced value.
3. To give an after-sale discount to the buyer.
4. When the quantity received by the customer is less than the quantity mentioned in the tax invoice.
5. Cancelling any pending payments against invoices.
6. Any other similar reason.

All details of credit notes issued during the month should be furnished under GSTR-1 of the respective month. Any amendment to the credit note generated should be reported in the monthly GSTR-1. The corresponding details will automatically reflect in GSTR-2B and GSTR-2A of the recipient. Issuing a credit note is a convenient way for the supplier to amend his originally issued tax invoice. It is an easy way to reduce tax liability. No tedious task of claiming refunds is involved.  All credit notes under section 34 of the CGST Act must be reported to the Invoice Registration Portal (IRP) for e-invoicing.

The conditions for issuing credit note under GST are:

1. It should be issued within the time limit as prescribed.
2. It should contain the original invoice number against which the credit note is issued.

Process of Issue of a Credit Note

The process of issue of a credit note is explained by way of the following example:

Supplier X sells goods to Buyer Y along with a tax invoice. Buyer Y observed some quality issues and defects in the goods and returned the goods to the supplier along with a debit note. Supplier X accepts the debit note and issues a credit note in the form of an acknowledgement to buyer Y.

Time Limit for Issue of a Credit Note

No time limit has been prescribed for the preparation of a debit note or a credit note. The issuance of credit notes and debit notes should be mentioned in the GST returns¹ filed for the month in which such a document is issued. However, the maximum time limit for declaring the issuance of a credit note is in the GST return if it pertains to a particular fiscal year. Credit Note should be declared on earlier of the following dates:

1. 30^th September of the succeeding year during which the supply is made.
2. The actual date of filing the annual return of the reporting period.

Contents of a Credit Note

The contents of the Credit Note are as follows:

1. Name and address of the business, along with the GSTIN of the supplier;
2. The type of document, i.e., whether a debit note or a credit note;
3. A unique serial number of maximum 16 characters. The unique serial number can be a numeric, alphabetic, alphanumeric or even specialised character;
4. Date of issue of the document;
5. Name and address along with the GSTIN of the supplier;
6. The taxable value of supply, tax rate, amount of tax and amount of tax credit to the buyer.
7. Signature of the supplier or his authorised representatives.

Procedure to Create a Credit Note

A credit note can be prepared in word, Excel, or any other software used for invoice creation by the business organisation. The following steps have to be followed to create a credit note:

1. Choose the credit note template
2. Update business logo
3. Input the date and issue of the credit note and the unique credit note number.
4. Add invoice reference number against the credit note issued
5. Insert the GSTIN of the supplier and customer along with the place of supply
6. Save the credit note

Conclusion

Credit notes are a great way to rectify the discrepancies in the original tax invoice without cancelling or reissuing the new ones. The entire process is easy and hassle-free for the business and its buyers. Another advantage of the credit note is that there is no time limit for issuing a credit note. But it is subject to a condition that the supplier must declare the issuance of credit notes in a fiscal year before September 30 of the following year or the date of filing the annual return, whichever is earlier.

FAQs

Read Our Article: What is Credit Default Swap (CDS)?

1. https://www.gst.gov.in/help/returns