credit note

Credit Note Meaning

A credit note, a credit memo, or a credit memorandum is a document issued by a seller to a buyer acknowledging the return of goods or services. The customer can use a credit note to make future purchases. A credit note confirms the return of goods or services and the reduction in the buyer’s liability.

In simple terms, a credit note is like a credit voucher we receive when we return a product. Instead of refunding the money, the businesses give us a voucher mentioning the redeemable amount. We can use the credit voucher when we make a purchase at the same outlet next time. However, the voucher comes with an expiry date before which we need to make a purchase. 

Credit Note in GST

According to GST rules, a credit note is not just issued for cash refunds but should also be issued 

  • When the price or tax mentioned in the invoice is found to exceed the actual value
  • When the customer returns the product
  • When the product or services or both are found to be deficient

In all these cases, the registered business which supplied such goods or services must issue a credit note with the prescribed details. 

Credit Note Format – Particulars to Include

The GST rules do not specify any format to generate credit notes but specify the particulars that must be mentioned on a credit note. 

Accordingly, the following are the particulars that must be included in a credit note. 

Seller’s InformationDetails of the seller – name, address, and GSTIN (goods and services tax identification number)
Document TypeName of the document – credit note or debit note
Serial NumberA unique consecutive serial number (not exceeding 16 characters and contains numbers, alphabets, alphanumeric, or special characters)
DateDate of issue of document
Buyer’s InformationDetails of the buyer – name, address, and GSTIN (in case of a registered business)
Other details to mention1.Serial number and date of the actual invoice or bill 
2.Value of goods as mentioned in the previous invoice, tax rate, and amount of tax credit to the buyer
3.Signature of the supplier or authorised representative

How to Create a Credit Note Format

To create a credit note, follow these steps:

  • Choose a credit note template to use.
  • Update the business logo.
  • Input the date of issue of the credit note and a unique credit note number.
  • Add the invoice reference number against which the credit note is issued.
  • Include the supplier and customer’s and the customer’s GSTIN and the place of supply.
  • Save the credit note.

When to Declare Credit Notes 

The details of a credit note must be declared in return for the month in which the credit note has been created but not later than 30th September or before filing the annual return, whichever is earlier.

When a supplier or business needs to cancel a previously issued invoice, they may issue a credit note. Credit notes allow enterprises to keep accounting records accurate by modifying invoice amounts without deleting the original invoice. Deleting an invoice is illegal, but a credit memo must be issued.

In addition to keeping accounting records accurate, credit memos allow customers to use their funds as they see fit. Credit notes are not tied to a specific invoice and can be issued separately to a customer. 

Credit Note Format

A credit note typically includes the following information:

  1. Name of the business, address, and GSTIN (goods and services tax identification number) of the supplier
  2. Type of document (debit note or credit note)
  3. Unique serial number (not exceeding 16 characters and may be numeric, alphabetic, alphanumeric, or contain special characters)
  4. Date of issue of document
  5. The taxable value of supply, rate, tax, and amount of tax credit to the buyer
  6. Signature of the supplier or authorised representative
  7. This information is typically included in the format of a credit note.

Process of Issuing a Credit Note

The process of issuing a credit note can be illustrated through the following example:

  1. Supplier A sells goods to Buyer B and issues a tax invoice.
  2. Buyer B discovers quality issues with the goods and returns them, along with a debit note.
  3. Supplier A accepts the debit note and prepares a credit note as an acknowledgement to Buyer B.

This process is depicted in the following flowchart:

How You Should Issue a Credit Note

The Time Limit for Issuing a Credit Note

There is no time limit for issuing debit notes or credit notes. These documents must be declared in the GST returns filed for the month they are issued. According to GST law, there is a maximum time limit for declaring debit notes and credit notes in GST returnsThese documents should be declared on the dates:

  1. 30th September of the following year in which the supply was made
  2. The actual date of filing the annual return for the relevant period.

How Credit Note Reduces Tax Liability

When a credit note is issued, it reduces the buyer’s liability for the goods or services in question. This means that the buyer owes the seller a lesser amount than was stated on the original invoice. The credit note allows the buyer to use the credit towards future purchases or offset it against their tax liability. By reducing the amount owed to the seller, the credit note also reduces the buyer’s overall tax liability for the goods or services in question.

FAQs on Credit Note

What is the Record Retention of a credit note?

Record retention of a credit note refers to a situation wherein the supplier is entitled to retain documents relating to credit notes for a specified period of time.

What are the guidelines for record retention of a credit note?

  • The record of credit notes should be preserved for at least 6 years from the date of filing the return.
  • When credit notes 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.
  • If credit notes are maintained electronically, they should be accessible from every concerned place of business.

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.

Do credit notes have to be issued during specific financial periods like quarterly accounting or monthly?

No, the credit notes can be issued at any time or when the situation arises for the business.

Are credit note and invoice the same?

No, a credit note is not an invoice but a supplementary document that goes along with an invoice in case there are changes.

Does the issuance of a credit note always lead to a refund?

Against a credit note, businesses can decide if they wish to provide a refund for the amount or allow the customers to buy products in the future against that amount.

What is the difference between debit and credit notes?

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 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 others may agree to hold the funds “in credit” so that the recipient may make future purchases without payment.

Can I get a tax rebate on a credit note?

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

Categories: Billing