Guide to a Credit note under GST
A GST-registered supplier of goods or services must issue a tax invoice. However, suppose circumstances arise during the business that results in a taxable supply value reduction. The supplier must then issue a credit note, credit memo, credit memorandum, or credit invoice.
BOOK A FREE DEMO
What is a credit note?
A document sent from one party to another encapsulates that the sender credits the other party’s account in his books. If the taxable value of the supplied goods changes, the supplier may issue a credit note citing the particulars.
One of the major differences between credit and debit notes is that a debit note diminishes a buyer’s liability. A credit note is a seller’s response to the buyer’s debit note. Credit notes can be used as a refund substitute because they enable a customer to buy products later without paying for them.
Also Get Familiar With – Reverse Charge Mechanism in GST
Reasons to issue a credit note
In line with Section 34(1) of the CGST Act, the supplier may provide a credit note when a tax invoice is created and needs to be modified to lower the tax burden indicated on it. The following are some of the most likely causes for the seller to provide a credit note:
- Due to buyer returns due to quality problems, service rejection, or receipt of damaged items.
- Higher charges were incorrectly collected from the buyer, or the buyer paid more than the invoiced value.
- Give the buyer a post-sale discount.
- The amount received by the customer is less than the amount stated on the tax invoice.
- Canceling any outstanding invoice payments.
- Any other comparable reason.
All credit note details issued during the month must be submitted in GSTR-1. The previously generated credit note can be amended, and the changes should be reported in the monthly GSTR-1. Related information will be automatically reflected in the recipient’s GSTR-2B and GSTR-2A.
It enables a supplier to amend previously issued tax invoices. It smoothens the process of reducing tax liability without the time-consuming process of claiming refunds. In addition, all debit and credit notes issued according to Section 34 of the CGST Act must be reported to the IRP for e-invoicing.
The conditions for issuing a credit note under GST are as follows:
- It must be issued within the timeframes outlined in the following section.
- The original invoice number for the credit note should be included. This linking is no longer necessary under the new system.
Process of issuing a credit note
The conditions for issuing a credit note in GSTR 1 are as follows:
- It must be issued within the timeframes outlined in the following section.
- The original invoice number for the credit note should be included. This linking is no longer necessary under the new system.
- Supplier A accepted the debit note and prepared a credit note as an acknowledgement to buyer B.
Time limit to issue a credit note
A debit or credit note may be issued at any moment. Debit and credit note issuance must be reported in the GST returns submitted for the month the notes are issued. GST law specifies the maximum time limit for displaying it in GST returns if it relates to a specific fiscal year. It should be announced on the earlier of the dates listed below-
- The supply was made on September 30th of the following year.
- The actual date on which the annual return for the relevant period was filed.
Format of a credit note
No specific credit note format is required by law, but the supplier must include the following information in a credit note.
Also Know About – GST Composition Scheme
Steps to create a Credit note
Excel, Word, or any other program the business organization uses to make invoices can be used to construct a credit note. Here are the procedures for creating a credit note:
- Select the credit note design that will be used.
- Update the business logo.
- Enter the credit note’s issue date and its particular note number.
- The reference to the invoice that the credit note is issued about.
- Add the GSTIN of the supplier and customer along with the place of supply.
- Save the credit note.
How to Adjust Tax Liability in Case of Credit Note in GST?
In the GST system, a credit note is issued when a seller needs to reduce the taxable value or tax amount charged in an original invoice. This usually happens due to returned goods, discounts offered post-sale, or incorrect invoicing. Here’s how tax liability adjustment works:
- Issue of Credit Note: The seller must issue a credit note referencing the original tax invoice.
- Adjustment in GSTR-1: The details of the credit note must be reported in the GSTR-1 return of the month in which the credit note is issued.
- Tax Liability Reduction: Once reported in GSTR-1, the corresponding reduction in output tax liability is reflected in GSTR-3B for the same period.
- Time Limit: Credit notes must be declared by 30th November of the next financial year or the date of filing the annual return, whichever is earlier.
- Matching with Recipient: The buyer (recipient) should accept the credit note details for accurate Input Tax Credit (ITC) reflection in their GSTR-2B.
Example: If a seller issued an invoice of ₹10,000 + GST (18%) and later issues a credit note of ₹2,000 + GST (18%), the GST liability is reduced by ₹360.
Details of Credit Note to be Filed in GST Returns
When filing GST returns, the seller must include specific details of each credit note issued during the tax period. These details ensure proper adjustment of tax liability and accurate Input Tax Credit (ITC) reconciliation for the buyer.
Key fields to report in GSTR-1 (Table 9B):
- Credit Note Number and Date
- Original Invoice Number and Date
- GSTIN of the Buyer
- Taxable Value Reduced
- Rate and Amount of GST Reduced (CGST, SGST/UTGST, IGST)
- Place of Supply
- Reason for issuing the Credit Note (e.g., Sales Return, Post-sale Discount)
These details help the GST portal and the recipient validate and reconcile tax adjustments effectively.
I am a Chartered Accountant with over 20 years of experience and a finance content writer. I focus on educating people about finance and taxation. I have written many blog posts on finance, taxation, trading, and investment on the BUSY website. My goal is to increase financial understanding by making complex concepts easier to grasp and to support educational programs in India.
Frequently Asked Questions
- Who needs to file GSTR-4?GSTR-4 must be filed by businesses registered under the GST composition scheme. These businesses have a turnover of up to ₹1.5 crore and pay a fixed percentage of their turnover as GST. They must file this return annually instead of monthly GSTR-1 and GSTR-3B.
- What details are required to be filed in GSTR-4?GSTR-4 requires details of total sales, purchases, and taxes paid during the year. It includes outward supplies made, inward supplies received from registered and unregistered persons, import of services, and tax liability.
- What is the penalty for non-filing of GSTR-4?For late filing of GSTR-4, a penalty of ₹200 per day (₹100 each for CGST and SGST) is imposed, subject to a maximum of ₹5,000. Interest at 18% per annum may also be levied on any outstanding tax liability.
- What documents do I need to file GSTR-4?To file GSTR-4, you need invoices for all sales and purchases made during the year, tax payment receipts, details of imports (if any), and a summary of your turnover and tax liabilities. These details help calculate your GST dues.
