Conditions for issuing Credit Note and Reversal of ITC

Credit notes play a crucial role in GST transactions, allowing registered persons to rectify errors and make adjustments. This article explores the conditions for issuing credit notes and the essential aspect of ITC (Input Tax Credit) reversal.

Understanding the Credit note and the conditions attached to Credit Note:

“Credit note” means a document issued by a registered person under subsection (1) of section 34 of CGST Act 2017.

Who Can issue credit note?

Credit note can be issued by any registered person, who has supplied such goods or services or both to the recipient.

Circumstances under which credit note can be issued?

• Taxable Value charged for the supply in the tax invoice is found to exceed the taxable value.
• Tax charged in the invoice is found to exceed the tax payable in respect of such supply.
• Where the goods supplied are returned by the Recipient of goods.
• Where goods or services or both supplied are found to be deficient.

Time limit for issuing credit note?

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 of the following month.

Last time limit for issuing credit note?

It should be issued not later than the 30 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.

Case : MR A of Delhi has supplied goods of Rs. 10,00,000 to MR J of Rajasthan. Assume it is an B2B transaction.

Tax Invoice issued by MR A for the Month of July 2023:

Mr. A filed the GSTR1 and GSTR 3B in August 2023, and the tax invoice reflected in the GSTR2B of MR. J.

MR. J has claimed the credit of Rs. 1,80,0000 on the basis of GSTR2B.

We have assumed that Mr. J has satisfied all the conditions of Section 16 of the CGST Act for claiming ITC.

Later on in the month of September 2023 , Mr. J., while going through books, sees that there is a mismatch between the tax invoice issued by the Supplier and the goods actually received.

MR.J contacted the supplier, told them about the issue, and made a request to issue a credit note for the same. MR.A, issued a credit note and filed the GSTR1, showing there as a credit note. The output tax liability of the supplier gets reduced once the credit note is issued and matched.

Now, As per Law what adjustments MR.J has to made ?

Corresponding Input tax credit of Rs.18000 (1,00,000*18%) is to be reversed by MR.J while filing GSTR3B for the relevant month.

What if recipient has not reversed the ITC?

• If the supplier has reduced the tax liability and the recipient has not reversed the ITC for the whole year, then the excess ITC availed by the recipient, based on the original invoices, is an undue ITC availed by the recipient .
• Since the supplier has less paid to the Government as the excess ITC corresponding to the Credit notes was adjusted from the taxable value of supplies made by him.
• If any undue or excess credit is availed by the recipient, the same is recoverable along with interest and penalty under the provisions of Section 73 of CGST Act, 2017or Section 74 of CGST Act, 2017.

In view of the above discussion, it is clear that ITC reversal is mandatory for the recipient of the supplies with regard to Credit notes issued by their suppliers and all provisions of relating to recovery of ITC will follow automatically