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What is Credit Note under GST – Format & Example

Every business owner has to issue a tax invoice after a transaction. If the customer wants to pay less than the amount quoted on the invoice due to any reason, the supplier issues a credit note to the customer. A credit note is also known as a credit memo, credit memorandum, or credit invoice.

Credit Note Meaning

A credit note is a commercial document issued by a seller or supplier to a buyer or customer in case of a cancellation, mistake in the order, or an issue with damaged products. The seller and the customer can decide the terms of returns on the credit note. 

When Should You Issue a Credit Note?

You can issue a credit note for different reasons such as:

  1. When the goods you delivered to a customer are damaged
  2. When you delivered the wrong goods to the customer
  3. When you charge more than the actual price of the goods or services rendered (due to invoicing mistake)
  4. When you have not included the applicable discount on the items on the invoice
  5. When the buyer wants to cancel the order and wants the payment returned

All the details of all the credit notes of a month must be included in the GSTR-1 of that month. If you have made any changes to a credit note generated in the previous months, you must include the changes in the GSTR-1 too. These details will then be shown automatically in GSTR-2B and GSTR-2A.

There are certain conditions for issuing a credit note under GST:

  • It should be issued within a specific time limit
  • It should mention the original invoice number of the invoice on which the credit note is issued

A supplier can reduce their tax liability easily by adding amendments to the GSTR-1. They can do this without going through too much paperwork. They also have to report all credit notes and debit notes filed under section 34 of the CGST Act to the IRP for e-invoicing. With a credit note issued, it becomes easier to keep track of the financial flow.

How You Should Issue a Credit Note

There is a certain process for issuing a credit note. We will study this with an example:

  1. Suppose there is a supplier S
  2. They sell to a buyer B and send a tax invoice
  3. B cancelled the order and returned the items with a debit note
  4. S accepted the debit note and issued a credit note to B

How You Should Issue a Credit Note

Time Limit for Issuing a Credit Note

Legally, there is no time limit for issuing a credit note or a debit note. You must just remember to include them in the monthly GST returns. For example, if you issue a credit note in February, you must include it in the February GST returns. 

The GST law states that you must declare the credit note in the GST returns in the same financial year. You can declare them on one of the below dates, whichever is earlier:

  • The date of filing the annual GST returns of a certain financial period
  • 30th September of the next year in which the transaction was done

Format of a Credit Note

The GST ACT has prescribed some rules to be followed while creating a credit note. According to the rules, a credit note format must have the following details:

  1. Name and address of the supplier
  2. GSTIN of the supplier
  3. Name of the document (Credit Note) written prominently
  4. Unique alphanumeric serial number
  5. Date of issue
  6. Name and address of the customer
  7. If the customer is GST-registered, include the GSTIN
  8. The address of the customer must include the State name and code
  9. Serial invoice number and date of the invoice against which the credit note is issued
  10. Amount of the goods and services purchased in the transaction
  11. Tax percentage and amount of debited tax
  12. Signature of the owner or authorised person at the supplier’s end

How Credit Note Reduces Tax Liability

If the supplier’s credit note has these matching details, the tax liability is reduced:

  1. The recipient’s tax return statement that has the correct reduction amount in the input tax credit column for the same financial period
  2. The duplicate of the reduced amount of claims in the output tax liability

In other words, when the customer’s claim for reduction in the input tax credit matches the supplier’s reduction claim in the output tax credit, the supplier’s tax liability is reduced. However, it is important to remember that a supplier cannot get their tax liability reduced with a credit note if the tax is transferred to another person.

How to Create a Credit Note

You can create a credit note using Microsoft Word, Excel, or invoicing software.

  1. Select the preferred template for creating a credit note
  2. Insert the business name and logo on the top left side of the credit notes
  3. Enter the date of issue and a unique serial number
  4. Enter the serial invoice number and date of the invoice against which the credit note is issued
  5. Add the GSTIN of the supplier
  6. Add the details of the recipient along with their GSTIN (if they are GST-registered)
  7. Save the credit note.

FAQs on Credit Note

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.

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.

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.

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.

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.

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.

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

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.

Can I get a refund using a credit note?

A credit note does not equal a refund. It depends on the terms of the agreement between the supplier and the recipient. In some cases, the supplier may agree to give a refund, while in others, they may agree to hold the funds “in credit” so that the recipient may make future purchases without payment.

What is a debit note?

When a customer returns items for any reason, they have to send a debit note along with them.

Can I get a tax rebate on my credit note?

You can get a reduction in a tax liability if you enter all the details on the GSTR-1 correctly and they match the details on your credit note.