Situations where a credit note can be issued

A credit note is issued to correct a genuine mistake or to give a credit to your customer under the following situations:

1. Correction of a genuine mistake (e.g. goods invoiced as standard-rated which should have been exempt or zero-rated);

2. Supply did not take place;

3. Charges are partly or fully waived before/after delivery of the goods;

4. Goods or services are accepted, but terms of the contract are not fully met (e.g. sub-standard goods are accepted by the customer at a reduced price);

5. Goods are returned or services are not accepted; or

6. Goods or Services are supplied for an unconfirmed consideration.

Information Required on Credit Notes:

To be valid for GST purposes, a credit note must clearly show:

  • An identifying number e.g. a serial number;
  • The date of issue;
  • Supplier’s name, address and GST registration number (GSTN);
  • Customer’s name and address and GSTN;
  • The reason for the credit note (e.g. “returned goods”);
  • A description, sufficient to identify the goods and services for which credit is being allowed;
  • The quantity and amount credited for each description;
  • The total amount credited excluding tax;
  • The rate and amount of tax credited; and
  • The total amount credited including tax;
  • Declaring Credit Note in GST Returns;
  • The number and date of the original tax invoice should also be shown against which the credit note is being issued.

If it is not possible for practical reasons to identify the purpose of raising credit note, there must be some material records to satisfy the GST authorities, if required in future.

Time Limit to issue credit notes:

Where a tax invoice has been issued for supply of any goods and/or services and the taxable value and/or tax charged in that tax invoice is found to exceed the taxable value and/or tax payable in respect of such supply, the taxable person, who has supplied such goods and/or services, may issue to the recipient a credit note containing such particulars as may be prescribed on or before the thirtieth day of September following the end of the financial year in which such supply was made, or the date of filing of the relevant annual return, whichever is earlier. Detail of Credit Notes to be given in the return in which such credit notes are issued.

Matching, reversal and reclaim of reduction in output tax liability (Revised MGL)

Matching, reversal and reclaim of reduction in output tax liability (Revised MGL)

Section 38 of MGL

(1) The details of every credit note relating to outward supply furnished by a registered taxable person (hereinafter referred to in this section as the ‘supplier’) for a tax period shall, in the manner and within the time prescribed, be matched-

 (a) with the corresponding reduction in the claim for input tax credit by the corresponding taxable person (hereinafter referred to in this section as the ‘recipient’) in his valid return for the same tax period or any subsequent tax period, and

 (b) for duplication of claims for reduction in output tax liability.

MATCHING OF CREDIT NOTES FURNISHED BY SUPPLIER WITH REVERSAL OF INPUT TAX CREDIT BY THE RECIPIENT.

(2) The claim for reduction in output tax liability by the supplier that matches with the corresponding reduction in the claim for input tax credit by the recipient shall be finally accepted and communicated, in the manner as may be prescribed, to the supplier.

CLAIM OF SUPPLIER FOR REDUCTION OF OUTPUT TAX LIABILITY MATCHED WITH REDUCTION IN INPUT TAX CREDIT BY THE RECIPIENT, ACCEPTED AND COMMUNICATED TO SUPPLIER.

(3) Where the reduction of output tax liability in respect of outward supplies exceeds the corresponding reduction in the claim for input tax credit or the corresponding credit note is not declared by the recipient in his valid returns, the discrepancy shall be communicated to both such persons in the manner as may be prescribed.

CLAIM OF SUPPLIER FOR REDUCTION OF OUTPUT TAX LIABILITY UN-MATCHED WITH REDUCTION IN INPUT TAX CREDIT BY THE RECIPIENT THEN COMMUNICATION TO BOTH THE PERSONS I.E. SUPPLIER AND RECIPIENT.

(4) The duplication of claims for reduction in output tax liability shall be communicated to the supplier in the manner as may be prescribed.

(5) The amount in respect of which any discrepancy is communicated under subsection (3) and which is not rectified by the recipient in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the supplier, in the manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated.

REVERSAL OF CLAIM OF REDUCTION IN OUTPUT TAX LIABILITY AND ADDITION TO THE OUTPUT TAX LIABILITY OF SUPPLIER INCASE OF NO RECTIFICATION OF DISCREPENCIES BY THE RECIPIENT IN HIS VALID RETURN.

(6) The amount in respect of any reduction in output tax liability that is found to be on account of duplication of claims shall be added to the output tax liability of the supplier in his return for the month in which such duplication is communicated.

(7) The supplier shall be eligible to reduce, from his output tax liability, the amount added under sub-section (5) if the recipient declares the details of the credit note in his valid return within the time specified in sub-section (9) of section 34.

THE REVERSAL OF CLAIM CAN BE RE-CLAIMED IF THE RECIPIENT DECLARES THE DETAIL OF CREDIT NOTE IN RETURN WITHIN THE TIME SPECIFIED I.E. RETURN FOR SEPTEMBER MONTH FOLLOWING THE FINANCIAL YEAR FOR WHICH THE CREDIT NOTE RELATES OR ACTUAL DATE OF FILING OF RELEVANT ANNUAL RETURN, WHICHEVER IS EARLIER.

(8) A supplier in whose output tax liability any amount has been added under subsection (5) or, as the case may be, under sub-section (6), shall be liable to pay interest at the rate specified under sub-section (1) of section 45 in respect of the amount so added from the date of such claim for reduction in the output tax liability till the corresponding additions are made under the said sub-sections.

INTEREST PAYABLE ON REVERSAL OF CLAIM FOR REDUCTION IN OUTPUT TAX LIABILITY BY THE SUPPLIER AND AMOUNT OF INTEREST SHALL BE ADDED IN THE OUTPUT TAX LIABILITY.

(9) Where any reduction in output tax liability is accepted under sub-section (7), the interest paid under sub-section (8) shall be refunded to the supplier by crediting the amount in the corresponding head of his electronic cash ledger in the manner as may be prescribed:

PROVIDED that the amount of interest to be credited in any case shall not exceed the amount of interest paid by the recipient.

INTEREST PAID DUE TO MISMATCH SHALL BE REFUNDED TO THE ELECTRONIC CASH LEDGER OF SUPPLIER INCASE THE RECIPIENT MAKES THE NECESSARY CORRECTIONS IN HIS/HER RETURN AFTER SUCH REVERSAL OF CLAIM.

(10) The amount reduced from output tax liability in contravention of the provision of sub-section (7) shall be added to the output tax liability of the supplier in his return for the month in which such contravention takes place and such supplier shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 45.

It can be seen from the above that reduction in output tax liability is feasible only when the RECIPIENT also reduces his/her input tax credit in respect of such credit note. Matching of credit note with buyer return will be made.

In case of mismatch of credit notes of supplier with corresponding return of recipient then the same shall be added back to the output tax liability of the supplier and consequential interest will also be charged. Therefore it is necessary to request to client to account for the credit notes in his/her books of accounts as well as in returns so that the claim of reduction in output tax liability on such credit notes does matched.

Comparative analysis – GST Regime and Service tax provisions

In today’s regime of service tax, there is no concept of matching of credit notes with recipient return. However, under GST regime, no reduction in output tax liability would be allowed unless the same is matched with the recipient’s return. Similarly under today’s regime, there is no time limit of raising the credit notes however under GST regime credit note can be issued maximum up to the date of filing of return of September month of following year or actual date of filing of relevant annual return whichever is earlier.

Therefore suppliers will need to keep reviewing all the receivables and credit notes, if any, will have to be issued before such date. If any credit note is issued after such date then benefit of reduction of output tax liability will not be allowed.

S. No. Particulars Service Tax GST
1 Time Limit No time limit for raising credit note Time limit prescribed
2 Reporting of Credit Notes No thorough reporting of credit note under Service tax return Proper reporting of each credit note
3 Matching of Credit Notes No matching of credit note with recipient Matching of credit note with recipient

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the authors are personal view and this cannot be quoted before any authority without the written permission of the authors. This article is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this article will be accepted by authors. It is recommended that professional advice be sought based on the specific facts and circumstances. This article does not substitute the need to refer to the original pronouncements on GST.

(Authors – CA Neeraj Kumar and CA Deepak Arya, RAPG & Co. Chartered Accountants from Delhi and can be reached at info@rapg.in, 9999836182/9818449179)

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