Different kinds of documents are issued under various circumstances whenever a transaction involves supply of goods or services. Such documents include tax invoice, debit note, credit note and bill of supply. This article, however, seeks to explain in detail credit note under GST. Furthermore, it will also explain the impact of issuance of credit note on output tax liability.
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Credit Note In Accounting
A credit note in accounting means a document that a supplier of goods or services issues to the recipient. This document notifies that the recipient’s account needs to be credited with certain amount. Such a credit is on account of an error in the original invoice or various other reasons. These reasons may include:
- sales return or certain goods or services rejected by the recipient
- goods damaged in transit or in some other way
- error in the price of goods or services in the original invoice
- Over payment by the recipient on the original invoice
So, let’s try to understand what is a credit note in GST and how does it impact your output tax liability.
What is Credit Note in GST?
Credit note in GST is defined under section 34(1) of the CGST act 2017. It is a document issued by the supplier of goods or services to the recipient where –
- a tax invoice has been issued for any supply of goods or services or both and:
- Taxable value or tax charged in the invoice exceeds the taxable value or tax payable in respect of such supply
- Goods supplied are returned by the recipient
- Goods or services supplied are found to be deficient
In the event any of the above cases, the registered supplier of goods or services may issue a credit note to the recipient.
Credit Note Example
Kapoor Pvt Ltd supplied goods worth Rs. 1,00,000 to M/s Sharma Traders on April 1,2017. A tax invoice of an equivalent amount was issued to M/s Sharma Traders on the same day. M/s Sharma traders made payment against the invoice. However, M/s Sharma later realized that certain goods were of poor quality and hence decided to return the goods. Goods worth Rs. 20,000 were returned to Kapoor Pvt Ltd on April 20, 2017. Since, goods were returned, Kapoor Pvt Ltd needs to raise a credit note in favor of M/s Sharma Ltd.
Such a credit note would notify M/s Sharma traders that a credit needs to be made in their account of an amount equal to the goods returned by them. This document is a proof that M/s Sharma Traders should reduce the amount it owes to Kapoor Pvt Ltd Rs. 20,000 under the terms of original invoice.
When Credit Note is Issued?
When a registered person supplies goods or services, he needs to necessarily issue a tax invoice. Upon issuing the tax invoice, however, a registered supplier is required to issue a credit note to the recipient. Thus, the supplier issues a credit note in the event of any of the following cases:
- the supplier charges value of goods or services in the invoice that is more than the actual value of such goods or services
- supplier charges a higher rate of tax than what is applicable on goods or services supplied
- the quantity of goods or services received by the recipient is less than what has been declared in the original tax invoice
- quality of goods or services supplied to the recipient is not up to the mark. Thus, necessitating the supplier to reimburse partial or total amount of the invoice.
- any other reasons
Credit Note Format
There is no prescribed format to prepare a credit note. However, a credit note issued by a supplier to the recipient must have the following particulars:
- name, address and Goods and Services Tax Identification Number (GSTIN) of the supplier
- nature of the document (credit note or debit note)
- a consecutive serial number that is unique and should :
- not exceed 16 characters,
- be in one or multiple series,
- contain alphabets, numerals or special characters such as hyphen, dash etc
- any combination thereof
- date of issue
- name, address and GSTIN of the recipient, if registered
- in case the recipient is unregistered, then name, address of the recipient and address of delivery along with name of state and its code needs to be given
- serial number and date of the corresponding tax invoice or bill of supply as the case may be
- value of taxable supply of goods or services, rate of tax and the amount of tax credited to the recipient
- signature or digital signature of the supplier or any of his authorized representatives
How to Adjust Tax Liability in case of Credit Note
Time When Credit Note is Issued
Say a supplier issues a credit note with regards to goods or services supplied to the recipient. In such a case, he must declare the details of such a credit note in the return for the month in which such a credit note is issued. However, such a declaration:
- should not be later than the month of September following the end of the financial year during which such a supply is made or
- the date when the relevant annual return is furnished, whichever is earlier of the two.
This means where credit note is issued after the month of September, the output tax liability in such a case shall not be reduced.
Matching of Output Tax Liability of Supplier
The reduction in the output tax liability of the supplier in case of credit note must get matched. The details of credit note with regards to the outward supply made by the supplier for a given tax period needs to be matched with:
- the corresponding reduction in the input tax credit claim made by the recipient in his return for the same or subsequent tax period
- for duplication of claims for reduction in outward tax liability
This is to say that the:
- reduction in the input tax credit claim made by the recipient needs to match with
- the claim made by the supplier for reduction in outward tax liability.
Once this is matched, it is accepted and communicated to the supplier. However, there might be the case where incidence of tax and interest on a supply has been passed to any other person. In such a case, the contraction in the output tax liability of the supplier shall not be allowed.
Communication of Discrepancy
This section deals with instances where discrepancies occur either on the part of supplier or recipient. And such discrepancies are communicated to either one or both the parties in various circumstances.
The discrepancies are communicated to both the supplier and recipient:
- when the reduction of output tax liability with respect to outward supplies is more than the corresponding contraction in the input tax credit claim or
- credit note pertaining to supply made in a particular month has not been declared by the recipient in the return for the same month
Whereas, the same shall be communicated to the supplier only. Provided the discrepancy pertains to the duplication of claims for contraction in outward tax liability.
However, there might be a possibility that the amount in respect of which the discrepancy is communicated to the recipient is not rectified by him. Such a rectification must be made in the same month in which discrepancy is communicated. In such a case, the discrepancy would be added to the outward tax liability of the supplier. And this would showcase in the return for the month following the one in which discrepancy is communicated.
Furthermore, there might be a case in which the amount of discrepancy is on account of duplication of claims by the supplier. And the same has not been corrected by the supplier by reducing his outward tax liability. In such case, the discrepancy amount shall be added to the output tax liability of the supplier. The same should be displayed in his return for the month in which such a discrepancy is communicated.
Record of Credit Note
Both the supplier as well as recipient need to maintain the records of credit notes for up to a period of 72 months. Such a period begins from the due date of furnishing of annual return for the year that pertains to issuance of such documents. However, where these documents are maintained manually, a record should be maintained at every related place of business mentioned in the certificate of registration. Furthermore, where such documents are maintained digitally, it shall be accessible to every related place of business.
Thus, we can conclude that credit note is a document that is issued to amend the value of goods or services in the original tax invoice. This method is not only easy but also legally sound to revise the taxable value in the original tax invoice. By issuing a credit note, a supplier can easily reduce is outward tax liability in his returns without undertaking the strenuous process of tax refunds.