Detailed note on Credit Note under GST

[Ganeshan Kalyani]

Credit note is a document raised by a registered person to reduce the taxable and tax amount of a tax invoice which was raised with a higher value. Say for e.g. the taxable value on an invoice is ₹ 100/- and tax charged is ₹ 18/-. The taxable value was supposed to be ₹ 95/- and tax accordingly applicable was ₹ 17/-. In order to correct the invoice the supplier can raise a credit note of ₹ 5/- with tax ₹ 1/-. Thus, the outward supply of the supplier would have become ₹ 95/0- and ₹ 17/-.  

A credit note can be issued in case the customer who received the goods has return it back on account of  the deficiency in the goods or for any other reason. In GST preferably the supplier should raise the credit note or debit note as the case may be. If the credit note raised is in respect of B2B supply then it will be shown in table 9 of FORM GSTR-1 and if it is against B2C supply it should be shown in table 7 of FORM GSTR-1.

Up to 31.01.2019, one credit note was allowed to be issued for one invoice. The reference of corresponding original invoice was required to be shown in return against the credit note. This was possible in case of goods returned but it was not possible in case of volume discount. Volume discount is generally given by supplier on successful lifting of the goods by the customer beyond the quantities agreed to be lifted within certain period of time. In such case one to one correlation of invoice against credit note is not possible as the discount is given against entire turnover happened during that period and not against one particular invoice.

With the amendment in section 34 vide CGST (Amendment) Act, 2018 effective from 01.02.2019 one or more credit note can be issued against an invoice and vice versa. However, it is understood that Govt. has not made amendment in the return in line with this provision. But a work around may be thought of by mentioning any one invoice number out of total invoices issued during the agreed period against the credit note issued for volume discount. Needless to mention that credit note with GST can be issued only up to six months from the end of the financial year to which the original invoice pertains to. Post that period only financial credit note can be issued by the supplier. Financial credit note is issued only to adjust the taxable value and not the tax in the books of account.

Method of raising credit note is being given by CBIC vide Circular No. 72/46/2018-GST dated 26.10.2018 for time expired drugs or medicines returned back by the customer. The principal in this case may be applied to another similar case. In the circular first method mentioned is that the credit note can be issued by the supplier with GST if the same is issued before 30th, September of following year. The credit note will have to be uploaded by the supplier to adjust his tax liability. The tax so adjusted by the supplier should also be reversed by the customer from his input tax credit ledger. And if the credit note is issued after the said date then credit note without GST to be raised and in this case the tax liability of the supplier cannot be adjusted.

If one analysis the impact of credit note with and without GST, then one can be understand  that there is no financial impact as such. If the credit note is with GST then the customer is supposed to reduce his tax liability and supplier can reduce his tax liability. And if credit note is issued without GST then the customer will have to pay the supplier the amount equivalent to tax component so as to tally the supplier and customer account. And the customer is not required to reverse the input tax credit already taken by him. Hence, no different impact arrives in both the scenario.

Second method mentioned in the circular is that the customer returning the goods can do so by raising a tax invoice considering it as fresh outward supply. In that case the supplier (being customer for this transaction) can treat it as purchase and take input tax credit. The tax amount will also appear in GSTR-2A upon filing of GSTR-1 by the customer (being supplier for this transaction). In case the supplier receiving back the goods destroys the goods then he has to reverse the input tax credit taken on such tax invoice. It is clarified that credit taken based on tax invoice issued by customer returning the goods has to be reversed in case the goods received is destroyed and not the tax on inputs used to manufacture such goods.

The goods returned by customer by raising tax invoice and booking as sales in his books is actually not a supply for him. On the other hand the supplier who receives the goods and accounts it as purchases is actually not a purchase for him. This is a purchase return for customer and sales return for the supplier.  If it is considered as purchase by supplier then his purchases will go up and sales figure may show higher amount. The treatment for the goods received back in GST is different from that of the treatment given in books of account. The work around may be thought of is that after accounting the purchase by the supplier he can pass a journal entry to reduce his purchase and reduce the sales revenue figure. Similarly, customer can pass an entry by reducing his sales revenue and reducing his purchases.

The e-way bill in case of goods received back is essential. Either the customer returning the goods back or the supplier raising credit note can raise e-way bill. The customer can inform the supplier about the quantity and value of goods which he intend to return. Based on the information received the supplier should raise credit note and give it to the customer. The customer on receiving the credit note should prepare delivery challan and generate e-way bill and then initiate movement of goods.

While reconciling GSTR-2A the credit note details are also required to be reconciled by the customer. On acceptance of credit note transaction by the customer in the said report it is implied that he has reversed the input tax credit and thus the supplier can reduce his tax liability. The new return which is to come into force from October 2019 for large taxpayer such reconciliation would be mandatorily required as the credit eligibility is based on acceptance of the invoice populated in GSTR-ANX-2. Inward supplies , amendment invoice, credit note, debit note all are to be accepted/reject/kept on hold by the customer. GST RET-1 is a computation statement prepared automatically based on GST ANX-1 (outward supplies) and GST ANX-2 (inward supplies). Thus, necessary readiness is required to be arranged for in particular by the large taxpayer on availability of tax executive (manpower) and readiness of information technology.