In this article, we will help you to explore the concept of credit note under GST.
Every GST registered supplier who deals with sales of taxable goods or services must issue a tax invoice to the buyer. This tax invoice acts as an instrument to validate transactions executed between the trading parties. In certain cases, the need to issue credit note arises where the original invoice issued at the time of sale requires changes. There can be several reasons responsible for requiring alterations in the invoice. That’s where credit notes come into play.
What is a credit note in GST
A credit note is a legal document issued by a supplier to the buyer. This document serves as an acknowledgment that the buyer’s account has to be credited with a certain amount. In case, if the buyer is not satisfied with the quality of products, or there is any discrepancy in the price of goods/ services in the invoice, or the tax charged in the invoice exceeds the tax payable, then the buyer shall return the goods/services to the supplier. In return, the supplier issues a credit note to the buyer to notify him that the goods/services returned have been recorded (return inwards) and credit is being extended for it.
Thus, a credit note provides a convenient way to organize your finances as well as comply with the requirements of a GST invoice. It adjusts values in the original tax invoice to help declare the valid GST amount.
Credit notes play an important role in the invoicing process, although they’re not always used, and so can be a little confusing to understand. In this article, we’ll break down credit notes so you know exactly when and how to use them. We’ll walk you through the detailed information that should be included whenever you issue one, complete with helpful examples and credit note templates.
On 9th Feb 2021, Mewara Sons & Co., a registered supplier from Delhi, supplied goods worth Rs. 1,00,000 to M/s Kapoor Traders, also a registered trader in Delhi. On the same day, Mewara Sons & Co. released a tax invoice, and Kapoor Traders cleared the payment. Later, M/s Kapoor found that some goods were of inferior quality, therefore, decided to return the goods. Goods worth Rs. 30,000 were sent back. Here, Mewara Sons & Co. must issue a credit note to M/s Kapoor Traders for return of goods and GST charged.
This credit note will act as proof that the amount equivalent to goods returned is to be credited to M/s Kapoor Traders account. As per the original invoice clause, M/s Kapoor traders should reduce the amount it owes to Mewara Sons & Co. which will result in reducing tax liability. This credit note will act as proof that the amount equivalent to goods returned is to be credited to M/s Kapoor Traders account.
When to issue a credit note?
According to the GST law, a supplier must issue a credit note under the following circumstances:
- The actual value of goods/services supplied is lower than that specified in the original tax invoice.
- The tax charged by the supplier on goods/services in the invoice exceeds the payable amount related to the supply.
- The quality of goods/services provided is not as expected under which the supplier has to reimburse the partial or complete amount.
- Goods/services supplied are returned by the buyer for other similar reasons.
Credit note format under GST
A credit note in GST format needs to contain the following details:
- Name, address, and Goods & Services Tax Identification Number (GSTIN) of the supplier.
- Document type (credit note or debit note).
- Date of the issue of the credit note.
- A consecutive, unique serial number (not more than 16 digits) comprising alphabets, numerals, or special characters like a hyphen, dash, slash, etc.
- Name, address, GSTIN/ Unique ID Number, of the buyer, if registered.
- Name, address, and the delivery address of the recipient along with State name and code (in case the buyer is unregistered).
- Serial number and date of related tax invoice or bill of supply.
- Value of the taxable supply, payable tax rate, and the amount of tax credited.
- Signature/digital signature of the supplier or his authorized person.
How to create a credit note
For creating credit notes, myBillBook is a one-stop choice. The application helps you create professional and consistent credit notes at any time from anywhere. Using My BillBook generating credit notes is much easier. It minimizes your efforts while reducing the probable chances of making mistakes.
As compared to other applications, My BillBook is one of the simplest and easy-to-use solutions. The features are effective and enhanced to assist business owners to create and manage invoices. Plus, it also ensures appreciable time saving as it comes with a unique feature of sharing credit notes over WhatsApp, and also print if needed.
Details that need to be covered in the credit note
– Header: Provide the type of document.
– Serial Number: Provide a different and unique serial number for each new credit note issued. Also ensure the credit note is only in 16 characters and not more. The serial number can be a combination of alphabets, numerical and special characters like dash, hyphen etc.
– Date: The date when the note is issued.
– Invoice Details: Add the invoice number and invoice details for reference and less confusion and the date of issue.
– Supplier Details: Name, address and GST number of the supplier.
– Contact Details: Add the contact details of the supplier and also their Goods and Service Tax Identification Number.
– Amount: The taxable value of goods or services, rate of tax and the amount of the tax credited or, debited to the recipient.
– Verification: Signature or digital signature of the supplier or their authorised representative
How to adjust tax liability in case of credit note under GST
The concerned party responsible for issuing a credit note on the delivery of goods or services or both should furnish the details of the credit note in GST returns declared for the month in which the credit note is raised. The details have to be declared earlier of the following dates:
- September following the end of the financial year in which such supply was made, or
- Prior to the date of filing the relevant annual return.
Note: The output tax liability will not be reduced in cases where a credit note is issued after September or filing of annual return.
Delinking of credit & debit notes from invoices
The Goods and Service Tax Network (GSTN) has activated the validation of delinking Credit or Debit Notes (CDN) from their initial GST invoice on the GST platform in 2020. In other words, GSTN has allowed the registration of combined credit or debit notes in GSTR-1. Under this provision, taxpayers will no longer be required to record the original invoice number and date when filing credit or debit reports.
Companies would not face any practical difficulties when issuing a single credit or debit note against multiple invoices when marking one CDN against each invoice is not possible.
Criteria for matching output tax liability of Supplier
In order to become eligible for a reduction in output tax liability, a supplier must raise a credit note and get it matched. The specifics of a credit note as furnished by the supplier for outward supply for a specific tax period must match:
a. With the corresponding details of claim reduction as reported by the recipient in his input tax credit for outward tax liability for the same tax period or any consequent tax period.
b. Besides, the credit note will also be matched for duplication in outward tax liability.
After the credit note is considered matched, the claim for reduction is accorded the final acceptance. The supplier is notified of this through a common communication channel. However, in cases where the burden of tax and interest of such supply has been handed over to any other person, no claim for reduction in output tax liability shall be permissible.
Communication of discrepancy
In case of information mismatch, the discrepancies are to be communicated to both parties. Various circumstances under which discrepancies shall be notified include:
- The claim for reduction of output tax is higher than the corresponding reduction in input tax credit claim.
- The details of the Credit note are not declared by the recipient in return for the subsequent period.
Moreover, for discrepancies concerning duplication of claims, communication should only be made to the supplier. In such a situation, the supplier is committed to making suitable rectifications in his return of the month in which the discrepancy is communicated. Failure to do so will result in adding a discrepancy amount to the output tax liability of the supplier.
Similarly, if the discrepancy has been from the recipient’s side, he is liable to rectify it in the same month in which the discrepancy is made available. If not rectified, the discrepancy amount will be added to the tax liability of the recipient along with the payable interest rate.
Credit Note FAQs
1. What are the guidelines for record retention of a credit note?
Record retention refers to a situation wherein the supplier is entitled to retain documents relating to credit notes for a specified period of time.
Guidelines for Record Retention:
- The record of credit notes should be preserved for at least 6 years from the date of filing return.
- In cases where documents are managed manually, they should be made available at the primary as well as all other additional places of business specified in the certificate of registration.
- Likewise, if maintained electronically, documents should be accessible from every concerned place of business.
2. Is an unregistered person eligible to issue a tax invoice?
No, only registered individuals are permitted to issue a tax invoice. In accordance with section 32 of the CGST Act, no unregistered person shall collect tax in connection to the supply of goods or services or both.
3. What to do when credit notes are to be issued for multiple invoices? One credit note for multiple invoices is permissible. So, instead of sending individual credit notes for multiple invoices throughout the financial year, a registered person can raise a consolidated invoice.
4. Do these notes have to be issued during specific financial periods like quarterly accounting or monthly?
No. These notes can be issued at any time they need or the situation arises for the business.
5. Is Credit Note an invoice?
No. Credit Notes are not an invoice but a supplementary document that goes along with an invoice in case there are changes on the invoice.
6. Does the issuance of a Credit Note always lead to a refund?
Against a credit note, businesses can decide if they wish to receive a refund for the amount or if they wish to buy products in the future against that amount.
7. What is the difference between a debit and a credit note?
A debit note is issued by the buyer whereas a credit note is issued by the supplier
8. Can you raise a Credit Note via myBillBook?
Yes. myBillBook provides you with an inbuilt template that you can use and just put in the details to raise an invoice. You can also edit the template according to your needs and make a credit note that suits your business.