Credit note is not an instrument to correct the mistake or error in tax invoice issue under GST
Introduction: Credit notes play a crucial role in the Goods and Services Tax (GST) framework, particularly in managing transactions between businesses and consumers. However, it is essential to understand that credit notes are not instruments for correcting mistakes or errors made during invoicing. This article aims to clarify the circumstances under which credit notes can be issued, the legal provisions governing them, and the implications for both suppliers and recipients.
Categories of Credit Notes Under GST, credit notes can be broadly classified into two categories:
Business to Business Transactions (B2B Supply)
Business to Consumer Transactions (B2C Supply)
While businesses often issue credit notes to cancel tax invoices, the process is not straightforward and requires adherence to specific regulations to effectively reduce outward tax liability.
Legal Provisions Governing Credit Notes The issuance of credit notes is governed by Section 34 of the CGST Act, 2017.
Understanding of legal provisions: Before proceeding further, it is pertinent to refer the Section 34 which is as under:
(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 2[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 3[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, 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.
Situations for Issuing Credit Notes: A registered supplier may issue a credit note in the following scenarios:
1. The taxable value or tax charged in the invoice exceeds the actual value or tax payable.
2. Goods supplied are returned by the recipient.
3. The quantity received is less than what was declared in the invoice.
4. The quality of goods or services is unsatisfactory, necessitating a reimbursement.
Time Limit for Issuance: Credit notes must be issued within the prescribed time limit, specifically by the thirtieth day of November following the end of the financial year in which the supply was made.
Adjustment of Tax Liability: Any registered person issuing a credit note must declare it in their return for the month it was issued. The tax liability will be adjusted accordingly, provided that the recipient reverses the input tax credit (ITC) associated with the credit note. Proviso of sub section (2) of section 34 amendment by Finance Act 2025 mandating that recipients reverse input tax credit arising from a credit note, thereby enabling the supplier to reduce their output tax liability.
Implications for Recipients: The responsibility of reversing the ITC lies with the recipient. Upon acceptance of a credit note, the supplier’s tax liability decreases, and the recipient’s GSTR 2B is updated. Conversely, if the recipient rejects the credit note, the supplier’s tax liability will increase in the subsequent month’s GSTR 3B.
Limitations on Issuing Credit Notes issued to unregistered person :It is crucial to note that GST law does not permit the issuance of credit notes for supplies made to unregistered persons, as the tax incidence has already been borne by the ultimate consumer. This restriction underscores the need for careful invoicing practices to avoid complications.
Conclusion In summary: Credit notes under GST can only be issued in specific circumstances and must comply with legal provisions. They serve as a mechanism for registered persons to adjust their tax liabilities, contingent upon the recipient’s reversal of ITC. Understanding these guidelines is essential for businesses to navigate the complexities of GST compliance effectively. it is impotent to highlight that GST law does not permit to issue credit note in case of supply made to unregistered person where the tax incident has borne by the recipient.
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