CREDIT NOTE CAN BE ISSUED WITHOUT GST

[Ganeshan Kalyani]

Extract of provision:

Sec.34(1) of CGST Act, “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

Sec. 15(3) “The value of the supply shall not include any discount which is given––

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if–

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.”

Analysis of GST Provision on Credit Note:

As per section 34(1), a supplier can issue a credit note with GST on following grounds:

1. If taxable value or tax in the tax invoice was charged more,
2. If goods supplied are returned by the customer i.e. sales return,
3. If goods or services or both are found to be deficient.

While point ii) and iii) are clear in terms of the reason for raising credit note with GST, point i) is open to cover various reasons like rate revision, cash discount etc. for which credit note with GST can be raised.

Further, sub-section (2) of sec.34 provides the time limit for the supplier to raise credit note with GST. As per the provision, the supplier is allowed to furnish the details of credit note raised with GST till the filing of GST return for the month of September following the end of financial year to which the corresponding original invoice pertains to. Thus, a supplier cannot declare the details of credit note with GST after September month’s return is filed. Thereafter the supplier can issue a financial credit note i.e. credit note without GST to settle the accounts.

Further, Section 15(3) allows the supplier to raise credit note with GST for discount,

1. at the time of supply – if the discount is mentioned on invoice
2. after supply has happened
   1. the discount was determined before or at the time of supply.
   2. the input tax credit attributable to discount is reversed by the customer.

While point a) is clear, point b) is subjective i.e. only if both the conditions mentioned in i) and ii) under b) are fulfilled by the supplier then credit note can be raised with GST. Otherwise, only financial credit note can be raised to settle the accounts. This clarifies that raising credit note with GST for discount is not compulsory as they are subject to fulfillment of conditions as stated above. However for the situations mentioned in point ii) and iii) of sec. 34(1), credit note to be issued with GST. Though the condition of Sec. 15(3)(b) is not specified for these two points it is implied that the condition of clause ii) i.e. input tax credit reversal by the customer must be fulfilled to raise credit note with GST.

Volume Discount:

Discount may be given by supplier for bulk purchases done by the customer. Bulk purchase discount is commonly called as volume discount. The effect of this discount is given by issuing credit note. And for determining whether GST can be charged on the credit note the supplier has to check whether he fulfills the condition given in section 15(3)(b). Generally, the scheme of volume discount given on completing the targeted purchase is determined and discussed with the customer before the supply takes place. Therefore, the discount given after the supply is pre-determined and satisfies the condition of the clause (b) of sec 15(3). Therefore, the supplier can raise credit note with GST. Based on the credit note the customer will reverse the input tax credit taken on his original inward supply.

Discount offered for early payment:

Discount is sometime given to induce customer for early payment or to recover a long pending dues. The discount so given is generally not determined at the time of supply or before the supply. In fact, the purpose of offering such discount is a solution or a way out which is conceived by the supplier after experiencing default in payment by the customer. Here, since, condition of clause (b) of sec 15(3) is not satisfied the supplier cannot raise credit note with GST.

Financial Credit Note & GST credit Note:

Where credit note is raised with GST the supplier reduces his GST liability and the customer reversed his input tax credit. The customer has pool of input tax credit and he reverses the GST part from the credit ledger balance and pay only the value of goods returned or discount amount to the supplier.

Where credit note is raised without GST the supplier does not reduces his GST liability and therefore the customer need not reverse the input tax credit already taken on purchases. However, the customer has to refund the value of goods returned or discount along with GST component to the supplier to settle the accounts.

The below table is given for ease of understanding:

In the books of Customer

Supplier's a/c

Credit note with GST

Particulars	Amt	Particulars	Amt
To Discount received	5	By purchase	100
To GST on discount recd	1	By GST on purchase	5
To Bank	99
	105		105
Credit note without GST
Particulars	Amt	Particulars	Amt
To Discount received	5	By purchase	100
To GST on discount recd	-	By GST on purchase	5
To Bank	100
	105		105

Assumption for understanding above table: the customer has received the goods but payment has not been made by him to the supplier.And, the payment from customer is happening after considering credit note.

In the first table, credit note is issued by the supplier with GST. The customer reverses the input tax credit of ₹ 1/- which is attributable to the discount and refunds ₹ 99/- to the supplier after considering the discount of ₹ 5/-. In net impact the customer refunds ₹ 99/- in cash to the supplier.

In the second table, credit note is issued by the supplier without GST. The customer need not reverse the input tax credit of ₹ 1/- which is attributable to the discount, but has to refund ₹ 100/- after considering the discount of ₹ 5/-. This makes the customer to pay ₹ 1/- more to the supplier by way of cash. Though there is no impact as the customer has already claimed input tax credit of ₹ 1/-. But, reversing input tax credit as shown in first table from credit ledger balance is easier for the customer particularly when he has enough balance in credit ledger rather than paying ₹ 1/- to the supplier in cash. Here, ₹ 1/- is mentioned as an example the actual amount may be considerable in actual situation for any taxpayer.

Thus, the customer prefers the credit note with GST at least till September month following the end of the financial year to which the original supply pertains to.

Goods return:

Sec.34(2) restricts the supplier to issue credit note with GST on sales return also. The supplier can raise a credit note with GST only up to the month of September following the end of the financial year to which the original supply pertain to.

As stated in above tables the customer end up paying GST attributable to credit note to the supplier after September month. Thus, the customer proposes or rather chooses to raise a tax invoice with GST on the sales return considering it as a fresh supply from his side. So, that he can pay GST on the fresh supply out of the credit ledger balance. The customer (in fact, the supplier) will also be able to claim input tax credit based on fresh invoice. In net effect the customer (supplier) avoids paying GST on sales return to the supplier by converting the transaction into fresh sales.

Conclusion:

Sec. 34(1) states that the supplier may issue a credit note with GST. The word ‘may’ has been used in the said provision. Also, Sec. 15(3)(b) imposes conditions to become eligible to raise credit note with GST on discount. The condition is that the supplier can reduce GST liability thru credit note only if the customer reverses the input tax credit. This indicates that credit note can be raised without GST.

Discussions to this article

[Alkesh Jani]

Shri Ganeshanji,

Your article is really very helpful and full of information, Rule 53 (1A) need to be incorporated so as to make this article the best.

[Ganeshan Kalyani]

Sri Alkesh Ji, thanks for your compliment and kind suggestion.

[Irshad Mohammed]

Sec 15(3)(b) is reg valuation, all it says one cannot reduce the value unless certain conditions are fulfilled incl cr note. We cannot ignore the credit note format which has GST inbuilt followed by filing mechanism which requires GST amount to be reported. Even if one attempts to issue cr note without GST which is needless it will only add up to the already increased work load in GST

[Ashish Tib]

Thanks for the article . In case of goods return on Credit note without gst, do we have to show them in GSTR-1 , Since there is no tax component ?

[niranjan gupta]

Section 34(2) is not talking about issue of credit note, but discussing adjustment of credit note issued.

[Ganeshan Kalyani]

Sir, credit note without GST need not be furnished in the return.

[niranjan gupta]

Definitely, I am discussing credit note with GST.

According to my understanding section 34(2) is talking about adjustment of credit already issued with GST not with respect to supply.