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. Since its inception in July 2017, the Goods and Services Tax (GST) has significantly reshaped India’s indirect tax structure. It has subsumed various central and state taxes into a single tax, making the tax system more streamlined and efficient. One of the essential aspects of GST is the concept of credit notes, which play a significant role in adjusting the taxable value and tax liability of transactions. 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. 

In this article, we are going to discuss all of what is credit note in GST and the credit note rules under GST.

Credit Note Meaning

A credit note meaning, a document 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 for Issuing a Credit Note

Credit notes are issued under various circumstances:

• Return of Goods: When a consumer returns goods/services due to defects, damage, or other reasons, a credit note is issued to reverse the original sale
• Price Reduction: A credit note may be issued when the original invoice price for goods or services is subsequently reduced. This document serves to adjust the invoice to reflect the lower selling price
• Quantity Discrepancy: If there is a discrepancy in the quantity i.e., if the quantity of goods delivered is less than the quantity billed, a credit note is issued to adjust the invoice value
• Discount or Allowance: If after the generation of the original invoice, a discount or allowance is granted to the customer then a credit note is issued to reflect the change in price
• Error Correction: With humans, there is always a possibility of errors occurring while generating invoices, such as incorrect pricing, calculation mistakes, or wrong GST rates, the issuance of credit notes is used to rectify errors in such cases

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

What is the Time Limit for Credit Note in GST?

It is essential to know the time limit for credit note in GST, it should be declared in the GST returns filed for the month in which it was 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 Notes 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 the EnKash platform to pay GST using any credit card in easy steps and avail of additional rewards from the card issuer, an interest-free credit period of up to 52 days, and healthy working capital and cash flow management.

Importance of Credit Note in GST

• Adjustment of Tax Liability: If a supplier for some reason ends up declaring an excess amount in the tax invoice initially then these credit notes enable suppliers to rectify discrepancies in invoice amounts, thereby reducing their tax burden. This process contributes to maintaining accurate tax records and prevents suppliers from overpaying taxes
• Customer Satisfaction: If any customer raises any discrepancies or issues regarding the quality or quantity of goods/services delivered then suppliers can address/resolve them by issuing credit notes. This fosters trust and satisfaction among customers
• Compliance and Record-Keeping: For any business registered under GST, compliance with GST regulation is of utmost importance and proper issuance and recording of credit notes help in maintaining compliance with these regulations. It ensures that all transactions are documented accurately, reducing the risk of audits and penalties
• Financial Accuracy: If there’s a discrepancy in the invoice amount and it is not recorded in the books, then it can later create gaps while calculating revenue and tax, credit notes contribute to this aspect by ensuring that revenue and tax calculations reflect the true value of transactions. This is vital for financial reporting and analysis

Legal Framework

The issuance of credit notes is governed by the provisions of the Central Goods and Services Tax (CGST) Act, 2017, and the State Goods and Services Tax (SGST) Act, 2017. Section 34 of the CGST Act outlines the conditions under which a credit note can be issued.

Difference between Credit and Debit Note

While credit and debit notes are both used to make adjustments to invoices, they serve different purposes:

Understanding the differences between credit and debit notes helps businesses manage their financial transactions more effectively and ensures compliance with GST regulations.

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 notes 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.

Common Mistakes and How to Avoid Them

Delayed Issuance

Issuing credit notes after the stipulated time limit can lead to non-compliance. To avoid this, businesses should regularly review their transactions and issue credit notes promptly.

Incorrect Details

Incorrect details on credit notes can cause discrepancies in financial records and GST returns. Businesses should ensure that all required particulars are accurately mentioned on the credit note.

Non-Reporting in GST Returns

Failing to report credit notes in GST returns can result in mismatched tax liability and input tax credit. It is imperative that businesses accurately report all credit notes on their corresponding GST returns.

Conclusion

Credit notes are an essential tool for correcting errors and discrepancies in tax invoices under the GST regime. By understanding the concept, reasons for issuance, procedures, and implications, taxpayers can effectively utilize credit notes to manage their tax liabilities and comply with GST regulations.

Disclaimer: This article is intended for general information purposes only and does not constitute professional tax advice. It is advisable to seek personalized tax advice from a qualified professional to address your specific situation.

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

Frequently Asked Questions

What is credit note in GST 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.

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 time limit for credit note in GST. 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.

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.

Are there any specific credit note rules under GST?

Yes, there are specific credit note rules under GST. Here are some of them:

• Only suppliers can issue credit notes. Recipients cannot
• No specific format is prescribed, but essential details like invoice number, date, reason for issuance, and tax amount must be included
• Credit notes can be issued for multiple original invoices or vice versa
• Credit notes are valid only for the financial year in which they are issued

• Credit notes cannot be issued for renegotiated prices or bad debts
• The details of the credit note are auto-populated in GSTR-2A for the recipient
• The recipient can accept, modify, or reject the credit note claim

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 raises 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.