Credit note is issued when issuer owes money to someone (means issuer has to give money to someone). Someone here means the person to whom the Tax Invoice has been issued.
Credit Note is a document raised by a registered person to reduce the taxable and the tax amount of a Tax invoice which was raised with a higher value.
For eg, the taxable value on an invoice is Rs 500 and the tax charged is Rs 90,
the value was supposed to be Rs 480 and tax charged should have been Rs 86.40
In order to correct the invoice supplier can raise a credit note for Rs 20 as taxable value and Rs 3.60 as tax amount, here supplier will reduce his/her Tax Liability and the corresponding receiver also have to either Not claim ITC or if claimed have to reduce ITC.
The supplier is allowed to issue what is called as credit note to the recipient in situations like:
• The supplier has erroneously declared a value which is more than the actual value of the goods or services provided.
• The supplier has erroneously declared a higher tax rate than what is applicable for the kind of the goods or services or both supplied.
• The quantity received by the recipient is less than what has been declared in the tax invoice.
• The quality of the goods or services or both supplied is not to the satisfaction of the recipient thereby necessitating a partial or total reimbursement on the invoice value.
• Any other similar reasons.
a.. The supplier may issue one or more credit notes for supplies made in a financial year through one or more tax invoices which have been issued by him earlier;( the Central Goods and Services Tax (Amendment) Act,2018 with effect from 1.2.2019 provides for the issuance of one or more credit notes or debit notes against multiple supplies in a financial year.)
b. The credit notes so issued must be declared by the supplier in the return for the month in which they are issued. However, maximum time limit for making such declaration is the earlier of the following two:,
1. The date of furnishing of the Annual return for the FY in which the original tax invoice was issued; or
Return for the month of September immediately succeeding the FY in which the original tax invoice was issued (i.e., for a tax invoice issued in April 2018, as well as a tax invoice issued in March 2019, the relevant credit notes cannot be issued after September 2019);
c. The recipient, on declaring the same, must claim a reduction in his input tax credit if the same had been availed against the original tax invoice;
d. A credit note cannot be issued if the incidence of tax and interest on such supply has been passed by him to any other person;
e. Every credit note must be linked to specific original tax invoice(s);
f. It is important to remember that there cannot be bunching of two financial years for issue of a credit note. So, for a tax invoice issued in March 2019 and another issued in June, 2019, a single credit note cannot be issued against both the invoices.
g. In case of a credit note issued for a discount, the discount must be provided in terms of an agreement entered into before or at the time of supply.
NON GST Credit Note/ Financial Credit Note.
One of the questions that comes to mind is whether it is mandatory to issue credit note with GST component,
or we can NON-GST credit note commonly known as Financial Credit Note that do not have any GST impact and need not to be reported in GST returns,
As per Circular No. 72/46/2018-GST Dated 26th October, 2018 which relates to Clarification in respect to return of expired drugs or medicines.
If the time limit specified in sub-section (2) of section 34 of the CGST Act has lapsed, a credit note may still be issued by the supplier for such return of goods but the tax liability cannot be adjusted by him in his hands. It may further be noted that in case time expired goods are returned beyond the time period specified in the sub-section (2) of section 34 of the CGST Act and a credit note is issued consequently, there is no requirement to declare such credit note on the common portal by the supplier (i.e. by the person who has issued the credit note) as tax liability cannot be adjusted in this case. On the other hand, the recipient of tax may be imposed to reverse the input tax credit that had been availed thereon.
Above circular 72 along with circular 92/11/2019-GST dated 7th Mar 2019 make it clear that (a) financial credits notes are extant practices in trade and (b) if tax adjustment is NOT made, then such credit notes are NOT to be reported in GSTR 1.
Two Methods were suggested, if the time is not elapsed as per section 34
1) Return of (time expired goods) to be treated as fresh supply
The value of the said goods as shown in the invoice on the basis of which the goods were supplied earlier may be taken as the value of such return supply. The wholesaler or manufacturer, as the case may be, who is the recipient of such return supply, shall be eligible to avail Input Tax Credit.
Where the time expired goods which have been returned by the retailer/wholesaler are destroyed by the manufacturer, he/she is required to reverse the ITC availed on the return supply ,
ITC which is required to be reversed in such scenario is the ITC availed on the return supply and not the ITC that is attributable to the manufacture of such time expired goods.
2) Return of (time expired goods) by issuing Credit Note:
The manufacturer or the wholesaler who has supplied the goods to the wholesaler or retailer, as the case may be, has the option to issue a credit note in relation to the time expired goods returned by the wholesaler or retailer, as the case may be. In such a scenario, the retailer or wholesaler may return the time expired goods by issuing a delivery challan, the tax liability may be adjusted by the supplier, subject to the condition that the person returning the time expired goods has either not availed the ITC or if availed has reversed the ITC so availed against the goods being returned.
Debit Note Introduction:
A supplier of goods or services or both is mandatorily required to issue a tax invoice. However, during the course of trade or commerce, after the invoice has been issued there could be situations like:
• The supplier has erroneously declared a value which is less than the actual value of the goods or services or both provided.
• The supplier has erroneously declared a lower tax rate than what is applicable for the kind of the goods or services or both supplied.
• The quantity received by the recipient is more than what has been declared in the tax invoice.
• Any other similar reasons.
In order to regularize these kinds of situations the supplier is allowed to issue what is called as debit note to the recipient. The debit note also includes supplementary invoice.
The GST Law mandates that a registered supplier may issue one or more debit notes for supplies made in a financial year through one or more tax invoices which has been issued by him earlier.
It is important to remember here that unlike in the case of credit note, there is no time limit for declaration of the details of debit note in the return. As such, a debit note in relation to a supply made in a financial year can be issued any time.
Format for Debit/Credit Note
There is no prescribed format but debit/credit note issued must contain the following particulars, namely:
(a) name, address and Goods and Services Tax Identification Number of the supplier;
(b) nature of the document;
(c) a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters hyphen or dash and slash symbolized as “-” and “/” respectively, and any combination thereof, unique for a financial year;
(d) date of issue;
(e) name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient;
(f) name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is un-registered;
(g) serial number and date of the corresponding tax invoice or, as the case may be, bill of supply;
(h) value of taxable supply of goods or services, rate of tax and the amount of the tax debited to the recipient; and
(i) signature or digital signature of the supplier or his authorized representative
The issuance of a debit note or a supplementary invoice creates additional tax liability. The treatment of a debit note or a supplementary invoice would be identical to the treatment of a tax invoice as far as returns and payment are concerned.
The records of the debit note or a supplementary invoice have to be retained until the expiry of 72 months from the due date of furnishing of annual return for the year pertaining to such accounts and records. Where such accounts and documents are maintained manually, it should be kept at every related place of business mentioned in the certificate of registration and shall be accessible at every related place of business where such accounts and documents are maintained digitally.