A credit note is a legitimate document that can be issued against a raised invoice. Any goods and services supplier who has registered under GST can issue a credit note. It is issued against the tax invoice in case the value of goods or services is declared more than the actual value, or the tax declared is more than it is applicable, or the quantity received is less than the declared value in the invoice, or the quality delivered is not satisfactory initiating partial or total reimbursement of the invoice value. 

What is Credit Note Meaning in GST?

A credit note in GST is issued to adjust or bring down the supplier's tax liability pertaining to errors or exclusions from the original tax invoice. It consists of all the information, including the original invoice, the amount credited, and the reason for issuing the credit note.

Reasons why credit note in GST is issued

A supplier can issue a credit note for the following reasons:

• If the goods purchased or services received are not up to the mark as promised. In this case, quality is questionable, leading to a credit note creation
• If mistakenly, the amount collected from the buyer is more than the amount mentioned on the tax invoice
• If there is a discount for the buyer post-product sale 
• If the quantity received is less than the one mentioned on the invoice
• In case of any pending payment cancellation against invoices

Steps to create a credit note in GST

A credit note can be created in excel, word, or any other software used for invoice creation by the business organization. Follow the steps below to create a credit note:

• Decide the template of the credit note 
• Place the business logo
• Mention the credit note issue date and the unique credit note number
• Make sure to add the invoice reference number against which the credit note is being issued
• Include the GSTIN of both the supplier and customer and the place of supply
• Save the credit note

Process of issuing credit note in GST

Know the process of credit note issuance with the following example:

• Suresh is a supplier of electronic items who delivers them to Ramesh along with a tax invoice
• Ramesh is not satisfied with the quality of the products delivered and returns them along with a debit note
• Suresh accepts the debit note and prepares a credit note as an acknowledgment to Ramesh

How much time does it take to issue a credit note in GST

It is essential to know that the credit note issued should be declared in the GST returns filed for the month in which it is issued. As per the GST laws, the maximum time for declaration of the credit note in GST returns in a specific financial year should be either of the below dates, whichever is earlier:

• The date of filing the annual return of the concerned period
• September 30th of the next year when supply was made

The details mentioned in the credit note issued must be submitted in the respective month in GSTR-1. However, if the credit note is generated earlier, it can be revised and must be reported in the monthly GSTR-1. These details will automatically reflect in the GSTR-2B and GSTR-2A of the one receiving it.

A supplier can change his originally issued tax invoice and reduce his tax liability without the need to claim any refund. 

GST credit note format 

There is no defined format for the credit note under any law. However, the supplier must contain the following information in a credit note.

• Business name, address, and GSTIN of the supplier
• Type of document — debit note or credit note
• A unique 16-character serial number containing numeric, alphabetic, alphanumeric, or specialized characters
• Date of issuance
• The taxable amount of supply, rate, and tax credit to the buyer
• Supplier or his authorized representative signature

How can tax liability be adjusted in Credit Note in GST?

A supplier can reduce his tax liability using the credit note in GST, provided it is issued on or before the last date of September. After the credit note is issued, the supplier's tax liability is reduced if the following details match: 

• The amount of the input tax credit claim for the buyer‘s return is the same, along with the time period.
• The duplicate claim is the same 

If both output tax liability and input tax credit claims are the same, this will be communicated to the supplier. It is important to note that in case of a change in tax and interest from a transaction is shifted to another registered person, there will be no reduction in the output tax liability of the supplier for that transaction. 

If in case there is a discrepancy in the output tax liability and the claim amount for an input tax credit, or the recipient has not declared the credit note in their returns, this will be communicated to both parties. If this is not rectified in the same month as communicated, the output tax liability in the return will be adjusted accordingly for the next month.

The buyer can claim input tax credit by paying the supplier for the goods and services received within 180 days of the invoice date. If the buyer fails to do so, the credit amount will be added to their output tax liability.

GST filling can help you claim the input tax credit and avoid penalties. You can use EnKash platform to pay GST using any credit card in easy steps and avail additional rewards from the card issuer, an interest-free credit period of up to 52 days, and healthy working capital and cash flow management.

Credit Note Recordkeeping

It is vital for both the supplier and the recipient to keep a record of the credit note for up to 72 months. This period begins from the date due for presenting the annual return for the year that requires submission of certain documents.

Businesses must not rely on the manual keeping of credit note as it comes with a high risk of misplacement and being torn. It should be stored well digitally and at every business-related place as mentioned in the certificate of registration. Digital storage enables easy access to all the stakeholders involved.

Got any more questions related to the credit note? Read these FAQs:

In what instances is a credit note in GST issued by the supplier?

When the taxable value mentioned by the supplier in the tax invoice is more than the actual taxable value of the goods and services given, that is when a credit note is issued.

What software can be used to make a credit note under GST?

You can use any software from the MS Office suite to make a credit note under GST, as there is no fixed format for the same.

Do credit notes under GST need to be retained?

It is important to retain the credit notes until 72 months from the date of annual return filing for the year related to such accounts.

Is there a limit to issuing a credit note?

Ideally, there is no limit. However, it should be declared on or before 30th September of the following year when the supply was made or on the actual date of the annual return filing, whichever is earlier.

What is a credit note with an example?

A credit note indicates a return of funds in case of an invoice error, wrong or damaged products, purchase cancellation, or other similar circumstances. Suppose a company called X sells 100 products worth 1 lakh to their customer ‘Y’ and raises an invoice against that purchase. However, Y discovers a defect in three of the goods delivered and returns them. X will have to raise a credit note to Y acknowledging the return of the defective goods.

Who will file the credit note in GST?

The supplier of the goods and services can issue the GST credit notes for certain specified instances under Section 34. These instances include tax invoices exceeding the actual taxable amount of the goods and services delivered.

What is the purpose of a credit note?

A credit note is issued when a supplier locates a discrepancy in an existing tax invoice, for example, by mentioning an incorrect amount or when a buyer returns the goods due to its poor quality. The note represents the excess amount that was paid by the buyer and is due to be returned to them by the supplier.

What is a credit note entry?

The journal entry for a credit note is as follows: Creditors' Account – Dr. To Goods Returned Account – Cr. A credit note is issued to the buyer of goods by the supplier of goods.

How to record GST credit notes in the Tally?

One can create a GST credit note in the format given above and upload it on Tally, like all other documents. The catch here is that EnKash Olympus is integrated with Tally. Therefore, in a case when a vendor will raise a credit note to one of its customers due to quality issues, the amount due from the customer’s end will be adjusted for the invoice against which the credit note is raised.