The GST regime in India, streamlined the taxation system and brought all indirect taxes under GST. This witnessed some parallel changes and adjustments, such as the issuance and treatment of Credit notes under GST.

A GST credit note is an important financial document issued by sellers/suppliers when they need to amend or reduce the value of goods/services in the sales invoice. This could be for several reasons, such as the buyer/recipient returning the goods/services. Credit notes therefore enable to adjust GST charges and reduce invoice errors, while maintaining tax compliance and fiscal accuracy.

Let us take a look at what is Credit note in GST, its example, format, timeline, how to issue credit notes, and more.

What is a Credit note in GST?

A credit note is a financial document that also functions as an adjustment tool in invoicing. It is issued by a seller/supplier to a buyer/recipient.

It is issued when the buyer returns goods to the seller or there is a change in the price/value of goods, or any other, thereby creating differences in the value of goods and the tax amount charged in the invoice or GST e-Invoice.

This provision, under Section 34 of GST laws enables businesses to stay GST compliant ensuring that the right amount of tax is levied (i.e., removes overcharging) and any errors, rectified.

Credit note example:

Let’s understand credit notes under GST with a simple example. Consider a scenario, when Company S, sells stationery products made of metal to Company B. There are 100 items, each costing ₹100.

• Total value of goods = ₹100 x 100 = ₹10,000
• Applicable GST rate = 18%
• GST charged = 0.18 x ₹10,000 = ₹18,00
• Final invoice amount = ₹10,000 + ₹1,800 = ₹11,800

However, upon delivery, Company B finds defect in 5 items and decides to return them. A Debit note is issued by Company B reflecting the change in number of defective items being returned and the subsequent change in the value of goods and GST payable.

That is ₹500 worth credit and ₹90 in GST amount (i.e., change in invoice amount).

Company S will now issue a credit note worth ₹500 for the defective items. This will adjust the values in the original invoice thus ensuring that Company B pays for the 95 items they have actually bought and kept (i.e., actual transaction).

Credit Note Format

When is a credit note issued?

A GST credit note is issued when the seller/supplier owes credit to the buyer. That is, when the value billed in the invoice is less that the actual transaction value (or when the goods have been returned). This enables to adjust the tax liabilities.

There are some typical cases under which a credit note can be issued under Section 34(1) of CGST Act 2017. We list a summary of the popular instances of issuance of a credit note in GST:

• Returned/Defective goods: When goods are returned due to qualify issues, change in requirements, or if it does not meet the expectations of the buyer
• Discrepancies in quality of services rendered: When the services rendered are below standards or not as per agreed SLAs
• Corrections in bill/invoice: If there is an error in the invoice generated due to overbilling, incorrect item quantity/price, cancellation, or any other
• Revisions in PO/Agreement: When there is any change in the purchase order or agreement terms that impact’s the value of the invoice, (Note: This must be mutually agreed and recorded)

Since details on all outward supply of goods (i.e., sales) must be recorded in GSTR-1, any changes in sales invoices and issuance of credit notes must also be recorded. This facilitates maintaining accuracy in financial records and ensures that tax is paid only on the actual sale of goods and services.

Also read: GST rate structure – Learn how goods and services are taxed under GST

By when can a credit note be issued?

Is there a time limit by when a credit note in GST can be issued? Since credit notes are issued to adjust GST liabilities, it must ideally be issued before GSTR-9 annual return is being filed or by 30 September of the year following the supply of goods (whichever is earlier).

This time limit ensures accurate data recording in GST return filing forms. That is, ensuring that GSTR-2A and GSTR-2B reflects data accurately as per GSTR-1, and ITC claims and reconciliations are aligned.

It also ensures that business operations are not impacted and records on all transactions of goods/materials and services is maintained with due diligence.

Difference between Credit note and Debit note

When discussing the importance of a credit note in GST, let us also understand its key differences with a debit note.

Note: Under GST, debit and credit notes are issued by the seller only.

Put simply, a debit note is issued when there is an increase in the value of goods and taxes. This can be if there are additional services rendered, or goods delivered, or there’s an increase in the price of the goods/services leading to the value of goods being lesser than the invoice amount.

A debit note can also be issue if there is an error in the GST rate charged (e.g., charging 18% GST instead of 12% GST on specific logistics transport services).

Also read: GST rates on logistics and transport services

What does a GST Credit note contain?

In this section we take a look at the format of a credit note. That is, the essential details that a credit note contains to make it valid and GST compliant.

Here’s a summary of the contents of a credit note:

• Document type, i.e., credit note
• A unique credit note number that distinguishes it and makes it easy to trace
• GSTIN number details of the seller and buyer, including business name, and address
• The date of issue of the credit note
• The original invoice/e-Invoice number for which the credit note is being issued
• Description of items (goods/services) for adjustment
• Reason why the credit note is being issued (e.g., defected item, damaged item, order quantity/quality mismatch, etc.)
• Actual amount and adjusted amount including taxes, with breakdown of IGST, CGST, and SGST/UTGST
• Signature (i.e., can be provided using DSC)

The comprehensive credit note format facilitates reconciliation and tracking of transactions, along with audits and compliance under GST norms.

How credit note impacts GSTR filing?

We understand the meaning of credit note in GST, how and when credit notes are issued and how they differ from debit notes. In the next section, let’s understand the impact of debit notes on the different GST return forms, especially GSTR-1, GSTR-2A and 2B, and GSTR-3B.

GSTR-1

GSTR-1 is a sales return form that records all transactions on the outward supply of goods and services (monthly or quarterly). So, when the seller issues a credit note to the buyer, it must be recorded in the form.

Since GSTR-1 form is used for capturing data for several other return forms, it is essential that the details are recorded here to ensure that the taxable value and tax on sales is accurate (i.e., lower than the actual invoice).

This ensures that actual tax liability is aligned with the actual sale of goods and the revenue collected from it after taking account of goods returned.

GSTR-2A and GSTR-2B

GSTR-2A (dynamic) and GSTR-2B (static) reflecting the inward supply of goods (i.e., purchases) is relevant to buyers. Based on the details recorded in the seller’s GSTR-1, these forms are auto-drafted.

When a credit note is issued to the buyer, it will reduce the Input Tax Credit (ITC) credit for the buyer ensuring that the buyer claims ITC on actual goods purchases (i.e., actual amount after the adjustments have been made). Any discrepancies must immediately be reported to the seller for adjustments in GSTR-1 in the next month or quarter to ensure accuracy in tax liabilities and reconciliation.

GSTR-3B

GSTR-3B is a return summary statement of all taxable transactions. As such, if credit notes are issued and not recorded, it will impact tax liabilities (output) and credits (input).

It’s essential therefore that credit and debit notes issued are clearly recorded for compliance and matching data in GSTR-3B (i.e., for sellers, reduce tax output; and for buyers reduced input tax credit).

Special Cases of Credit notes in GST

Credit Notes for Composite Supplies

For composite supplies (where the principal supply and ancillary supplies are bundled together), the credit note must be issued for the entire value of the supply, including both the principal supply and the ancillary supplies.

• Credit Notes for Unregistered Persons:
  If a supplier is not registered under GST, they cannot issue a credit note. However, the recipient may be able to claim a refund of excess tax paid.
• Credit Notes for Export Supplies:
  Credit notes for export supplies can be issued to adjust the refund claimed or the export duty credit. The supplier must provide the necessary documentation to support the claim.
• Credit Notes for Inter-State Supplies:
  For inter-state supplies, the credit note should indicate the place of supply and the applicable GST rates.
• Credit Notes for E-Commerce Supplies:
  For e-commerce supplies, the credit note should be issued by the e-commerce operator on behalf of the supplier.
• Credit Notes for Reverse Charge Mechanism:
  If the reverse charge mechanism applies, the credit note should be issued by the recipient. The recipient should also file a revised return to reflect the adjustment in tax liability.

Time Limit for Issuing Credit Notes in GST

Under the GST law, the credit note should generally be issued within the same tax period as the original invoice or within the subsequent tax period. This means that if the original invoice was issued in April, the credit note should be issued by the end of April or May.

If a credit note is issued after the due date, the supplier may be subject to penalties and interest. However, in certain cases, the tax authorities may accept late-issued credit notes if there is a valid reason for the delay.

*This article is for information only. For more details please visit the official GST website or consult with a GST practitioner or CA or tax consultant for professional advice.

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