Under the GST framework, credit note can be issued by the supplier only. A supplier can issue a credit note if he finds that the taxable value or the tax charged in a tax invoice is more than the actual taxable value or actual tax, or where goods are returned by the buyer, or where goods or services or both supplied by him are found to be deficient. Section 34 of the CGST Act, 2017 stipulates the situations under which a supplier can issue a credit note. The said section also prescribes the time limit within which a supplier should issue a credit note. By issuing credit note, a supplier reduces his output tax liability subject to the fulfilment of other conditions.
Relevant Provisions
Section 2(37) of the CGST Act, 2017 defines credit note as under:-
‘(37) “credit note” means a document issued by a registered person under sub-section (1) of section 34;’
Section 34 of the CGST Act speaks about the situations when a credit note can be issued by a supplier as well as the requirement to declare the details of such credit note in the return of the supplier. The relevant portion of the same has been reproduced below:-
“34. (1) 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.
(2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than the ¹[thirtieth day of November] following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:
Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.”
[1. Substituted for “September” by the Finance Act, 2022, with effect from 01.10.2022 vide Notification No. 18/2022 (Central Tax) dated 28.09.2022]
On reading of the above provisions, it emerges that a credit note can be issued under the following four circumstances-
- Where the taxable value charged in a tax invoice is found to exceed the taxable value in respect of a supply.
- Where the tax charged in a tax invoice is found to exceed the tax payable in respect of such supply.
- Where the goods supplied are returned by the recipient.
- Where goods or services or both supplied are found to be deficient.
By issuing a credit note under section 34, a supplier can reduce his output tax liability provided there is a corresponding reduction of input tax credit by the recipient and it is matched. However, in case of a financial or commercial credit note, where the supplier has not reduced his output tax liability, the recipient also need not reverse his input tax credit.
As per sub-section 1 of section 34 as amended by the CGST (Amendment) Act, 2018, w.e.f. 01.02.2019 a supplier can issue one credit note for multiple tax invoices or multiple credit notes for one tax invoice. Further, as per the proviso to sub-section 2 of section 34 of the CGST Act, 2017, a supplier can not reduce his output tax liability, if the incidence of tax and interest on such supply has been passed on to any other person. Therefore, a supplier can not reduce his output tax liability, if the credit note issued by him is not accepted by his recipient and if the recipient does not reverse the input tax credit attributable to such credit note.
Discounts through Credit Note
Many suppliers offer periodic / year ending discounts also known as volume discounts to their stockists, distributors etc. Such discounts can be passed on by the supplier through credit notes. The CBIC vide the Circular No. 92/11/2019 dated 07.03.2019 clarified that post supply/volume discounts established before or at the time of supply shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub section (3) of section 15 of the CGST Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier. The relevant portions of the said circular has been reproduced below:-
“ii. Some suppliers also offer periodic / year ending discounts to their stockists, etc. For example- Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of 2% if you purchase 15000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end. In commercial parlance, such discounts are colloquially referred to as “volume discounts”. Such discounts are passed on by the supplier through credit notes.
iii. It is clarified that discounts offered by the suppliers to customers (including staggered discount under ‘Buy more, save more’ scheme and post supply/volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub section (3) of section 15 of the CGST Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.”
Clause (b) of sub-section (3) of section 15 of the CGST Act stipulates that the value of the supply shall not include any discount which is given after the supply has been effected, if 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 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. Accordingly, where a supplier offers volume discount by issuing credit note under section 34 of the CGST Act, the recipient is required to reverse the ITC as is attributable to such discount.
Declaration of the Details of credit notes in the Return
The Central Government vide Notification No. 18/2022- Central Tax dated 28.09.2022 has appointed 01.10.2022 as the date on which the provisions of sections 100 to 114, except clause (c) of section 110 and section 111 of the Finance Act, 2022 shall be applicable. Accordingly, with effect from 01.10.2022, in terms of sub-section (2) of section 34 of the CGST Act, 2017, any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier. Prior to that the said time limit was the month of September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier.
The CBIC clarified that this extended time limit is applicable from the FY 2021-22 onwards.
Commercial/Financial Credit Note
A registered person may issue commercial/financial credit note without GST implication. Where a registered person issues commercial credit note, the recipient is not required to reverse the input tax credit pertaining to such credit note, because the supplier himself has not reduced his output tax liability.
Contents of Credit Note
A credit note referred to in section 34 of the CGST Act, 2017, shall 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 symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year;
(d) Date of issue of the document;
(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 unregistered;
(g) Serial number(s) and date(s) of the corresponding tax invoice(s) or, as the case may be, bill(s) of supply;
(h) Value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient; and
(i) Signature or digital signature of the supplier or his authorised representative.
Example
- Mr A sold goods to Mr B having invoice value of Rs 1,298/- (Taxable Value Rs 1,100/- + GST Rs 198/-). Later on, Mr A finds that taxable value should have been Rs 1,000/- and it is wrongly charged as Rs 1,100/-. In this case, Mr A would issue a credit note to Mr B for Rs 100/- + GST Rs 18/-. By issuing this credit note Mr A would reduce his tax liability by Rs 18/-. Mr B would also be required to reverse his input tax credit by Rs 18/-.
- Mr A sold goods to Mr B having invoice value of Rs 1,180/- (taxable value Rs 1,000/- + GST Rs 180/-). Later on, Mr A finds that GST should have been Rs 50/- (i.e. 5%) instead of Rs 180/- (i.e.18%). In this case, Mr A had charged excess GST of Rs 130/-. Therefore, he would issue a credit note to Mr B for Rs 130/- to reduce the GST to Rs 50/-.
- Mr A sold 1,100 units of Product X to Mr B @ Rs 10.50 per unit at an invoice value of Rs 11,550/- (taxable value Rs 11,000/- + GST Rs 550/-). Later on, he finds that only 1,000 units were delivered while price for 1,100 units were collected. In this case, Mr A would issue a credit note to Mr B for Rs 1,050/- (taxable value Rs 1,000/- + GST Rs 50/-) for the deficiency of 100 units.
- Mr A sold 1,100 units of Product X to Mr B @ Rs 10.50 per unit at an invoice value of Rs 11,550/- (taxable value Rs 11,000/- + GST Rs 550/-). However, Mr B finds that 100 units of the said goods were not as per his specification and he returned the said 100 units to Mr A. In this case, Mr A would issue a credit note to Mr B for the return of 100 units for Rs 1,050/- (taxable value Rs 1,000/- + GST Rs 50/-).