When you sell products, returns are inevitable. In most cases, you can simply refund the customer’s money and move on. But what happens when a customer returns merchandise, and you’ve already paid the GST to the government for that item? To make sure you’re not overpaying your GST, it’s important to understand:
– the system of goods return under GST and
– how to take advantage of any credits you might be owed.
Returned Merchandise Affects Tax Liability
Under the GST regime, sales are straightforward. You sell a product to a customer and charge them GST. Part of that tax goes to the central government. And since GST is a destination-based tax, part of it goes to the state government where the sale took place. Each month, you tally up your invoices in the online GST portal to find out how much tax you owe. If you have an input tax credit from the GST you paid on inputs for your business, you can subtract it from your outstanding amount.
When a customer returns that product, you give him or her the money back, including the GST he or she paid. But because you already paid that GST amount to the government, your tax balance is now positive . Reason being you paid more than you actually owe. What’s more, you also claimed more ITC than you’re actually due. Plus, if your buyer is GST-registered, the discrepancy affects his or her returns.
Returned Merchandise Filing Depends on the Buyer’s Registration
The way you handle the changes to your tax balance depends on the buyer. If the buyer is not GST-registered, the process is easy. When you go to file your next GSTR-1 form, all you need to do is include a list of sale returns. You should also include the breakdown of the interstate and intrastate returns.
If your buyer is GST-registered, the process changes. In that case, the government prefers credit notes. In this case, you simply issue the registered buyer a credit note for the value of the return. The government doesn’t have a specific format for the note. But it must include specific information, such as:
- the date, the GSTIN and contact information for the buyer and sellers,
- the serial number of the original tax invoice, and
- the value of the goods.
Once you issue a credit note, you must include it in your tax return for the month. Then, the credit automatically flows from your account to the buyer’s account, taking care of the tax discrepancies for you and your buyer. Keep in mind there’s a time limit on credits for goods return under GST. To get the credit for taxes paid, you need to file it no later than the September after the end of the financial year in which the original purchase took place. Or by your next annual return, whichever comes first.
E-Commerce Marketplace Returns Are Different
If you sell products through an online marketplace, the tax system is slightly different. In addition to the GST that you charge the customer, the owner of the marketplace deducts a TDS before sending the funds to you. This means the tax liability for both you and the marketplace owner are affected by a return. In this case, you’d include the returns on the GSTR-2 for unregistered buyers. OR issue a credit note for registered buyers. Once you file, the GST system automatically makes the changes for you, the marketplace owner, and the registered buyer, if applicable.
As the seller, you have the responsibility for handling returned merchandise. By issuing credit notes quickly and noting the tax difference on your next return, you can help ensure everyone in your supply chain is credited correctly.