All about Credit Note

It is mandatory for a GST-registered supplier of goods or services to issue a tax invoice. However, suppose circumstances arise during the business, which leads to the reduction in taxable supply value. In that case, the supplier must issue a credit note or credit memo or credit memorandum or credit invoice.

What is a credit note?

A credit note is a document given by one party to another mentioning that the sender credits the other party’s account in his books. After the supplier’s issue of the tax invoice, if there is any reduction in the taxable value of the goods supplied, he may issue a credit note mentioning the prescribed particulars.

It is not precisely a refund but acts as a replacement for a refund wherein the customer can buy the products later without paying for them. A debit note reduces the buyer’s liability, and the seller issues the credit note as an acknowledgement to the debit note raised by the buyer.

Reasons why credit note is issued

Section 34(1) of the CGST Act says that when a tax invoice is issued, and the same is required to be amended to reduce the tax liability mentioned in it, the supplier can issue a credit note. Some of the common reasons for which the seller issues a credit note are:

• On account of sales returned by the buyer due to quality issues, service rejection, or damaged goods receipt.
• Erroneously collected higher charges from the buyer or buyer paid amount is more than invoiced value.
• Give a post-sale discount to the buyer.
• The quantity received by the customer is less than the one which is mentioned in the tax invoice. 
• Cancelling any pending payments against invoices.
• Any other similar reason.

All the details of credit notes issued during the month should be submitted in GSTR-1 of the respective month. The credit note generated earlier can be amended, and the same should be reported in the monthly GSTR-1. Corresponding details will automatically reflect in the GSTR-2B and GSTR-2A of the recipient.

It is a convenient way by which a supplier can amend his originally issued tax invoice. He can easily reduce his tax liability without going through any tedious task of claiming refunds. Also, all the debit notes and credit notes issued under section 34 of the CGST Act need to be reported to the IRP for e-invoicing. 

Conditions for the issue of a credit note under GST are:

• It should be issued within the time limits as discussed in the next section.
• It should contain the original invoice number against which such a credit note is issued. However, under the new system, such linking is not required. 

Process of issuing a credit note

The process of issue of the credit note is explained by way of the below example:

1. Supplier A sells goods to Buyer B along with a tax invoice.
2. Buyer B observed some quality issues and thus returned the goods supplied along with a debit note.
3. Supplier A accepted the debit note and prepared a credit note as an acknowledgement to buyer B. 

The below flowchart illustrates the same-

Time limit to issue a credit note

There is no time limit for the issue of a debit note or a credit note. Issue of debit notes and credit notes should be declared in the GST returns filed for the month in which such a document is issued. GST law mentions the maximum time limit for declaring the same in GST returns if it pertains to a particular financial year. It should be declared on earlier of the below dates:

• 30th September of the following year in which such supply was made.
• The actual date of filing the annual return of the concerned period. 

Format and contents of a credit note

There is no prescribed credit note format under any law, but the supplier must contain the below information in a credit note.

Contents of a credit note

Below are the contents of a credit note:

• Name of business, address and GSTIN of the supplier
• Type of document, whether debit note or credit note.
• A unique serial number not exceeding 16 characters. It can be numeric, alphabetic, alphanumeric or can even contain specialised characters.
• Date of issue of document
• Name of business, address, and GSTIN of the supplier
• The taxable value of supply, rate, tax and amount of tax credit to the buyer.
• Signature of the supplier or his authorised representative.

Steps to create a credit note

A credit note can be created in excel, word, or any other software used for invoice creation by the business organisation. Below are the steps to create a credit note:

1. Choose the credit note template to be used.
2. Update the business logo.
3. Input the date of issue of credit note and unique credit note number.
4. Add the invoice reference number against which the credit note is issued.
5. Add the GSTIN of the supplier and customer along with the place of supply.
6. Save the credit note.

Debit notes and credit notes can be created easily using ClearOne software. Below are some of the features of ClearOne software:

• Be quick, fast forward your business – Create a credit/debit note from the invoice.
• With ClearTax, be assured to create GST, NIC complaint documents.
• Continuous improvements from a team of tax experts and the best software technologists.
• Create, access, and share your business documents from the web and mobile on the go.