Credit note and Discount under GST, and its impact on ITC of recipient of goods or Services
Credit note and discount is very common in all kind of business.
In general parlance credit note and discount may have same meaning i.e reduction in effective cost to recipient of goods or services. However the act has given a wider meaning to credit note in comparison to discount.
The provisions of credit note is covered by sec 34 of CGST Act whereas provisions relating to discount is covered by sec 15(3).
Let’s discuss provisions of discount and credit note in detail.
Discount can be given under 3 different scenario:
1. Before or at the time of supply (i.e on the face of invoice itself)
2. After the supply has been effected but in accordance with the terms of agreement prior to or at the time of supply.
3. After the supply has been effected but without any agreement prior to or at the time of supply.
Discount if issued after the supply, then it has to be necessarily issued through issue of credit note. The provisions of sec 15(3) w.r.t discount is as below:
|Timing of Discount||Impact on Transaction value||Condition|
|On or before time of supply and recorded in tax invoice||Reduced from Transaction value||No Condition|
|After supply but in terms of agreement before/at time of supply and can be traced to relevant invoice||Reduced from Transaction value||Recipient of supply has reversed ITC on credit note amount|
|Given after supply but without any agreement before/at time of supply (whether or not traceable to relevant invoice)||Not Reduced from Transaction value||No Condition|
Credit note can be issued u/s 34 under the following circumstances:
1. the value declared in the invoice is more than the actual value of the goods or services provided; or
2. the rate of GST or Tax amount charged is at a higher rate than what is applicable for the kind of goods or services supplied; or
3. the quantity received by the recipient is less than what is mentioned in the tax invoice; or
4. the goods supplied are returned by the recipient
5. the goods or services are found to be deficient.
The condition for issuing credit note is as below – Sec 34(2)
1. A credit note can be issued within 30th September from end of relevant financial year or before the actual date of filing annual return u/s 44 whichever is earlier.
2. The recipient must reverse the ITC amount claimed by him earlier on the amount of such credit note.
3. The credit note can’t be issued if the incidence of tax and interest on such supply has been passed by him to any other person.
In addition to Sec 15 and 34, Sec 16(2) 2nd proviso also plays an important part in credit note as far as the ITC claimed by receiver of goods or services is concerned.
Sec 16(2) 2nd proviso provides that where the receiver of goods or services fails to pay entire or part consideration to the supplier within 180 days from the date of invoice, then the recipient is required to reverse ITC (if availed earlier) along with applicable interest u/s 50 on unpaid portion of payment to supplier.
We can illustrate various scenario of discount and credit note with following example:
|Situation||Impact on supplier of goods or services||Impact on receiver of goods or services||Sec|
|1||Trade discount of 1% given on the face of invoice||The trade discount amount will be reduced from transaction value and GST is required to be paid on reduced transaction value||Receiver will be claiming ITC (if eligible) on reduced transaction value||15|
|2||Cash discount of 2% given upon the payment within 30 days as per terms of agreement||The supplier will issue credit note for cash discount amount and reverse his output tax liability on amount of such cash discount.||Receiver will account for this credit note issued by supplier and reverse the ITC (if claimed earlier) on the amount of such cash discount.||15|
|3||Due to liquidity problem supplier agreed to give ad-hoc discount of 5% if payment made within 3 days. (i.e not as per terms of earlier agreement)||The supplier will issue credit note but without reversal of GST amount. In short GST charged earlier can’t be reversed at all.||Receiver will account for this credit note issued by supplier and reverse the ITC (if claimed earlier) on credit note amount and pay interest to comply with provisions of Sec 16(2) second proviso, which provides that the recipient will have to reverse ITC if payment not made within 180 days from date of Invoice.||15, 16|
|4||Supply made on 01.03.2018. The goods were returned on 30.06.2018.||The supplier will issue credit note and reverse output GST amount.||Ideally Receiver should not have claimed ITC. However if he has claimed ITC earlier then he need to reverse the same along with Interest u/s 50.||34|
|5||Supply made on 01.03.2018. However the goods were returned on 01.12.2018 (i.e after 30.09.2018).||The supplier will issue credit note but without reversal of GST amount. GST amount can’t be reversed since credit note is issued after 30th Sep from end of FY (Assuming actual date of filing annual return is after 30th Sep)||Ideally Receiver should not have claimed ITC. However if he has claimed ITC earlier then he need to reverse the same along with Interest u/s 50.||34|
|6||Bad debt by recipient of goods or services||No GST liability can be reversed as this is not fulfilling the conditions under which credit note can be issued u/s 34.||Receiver will have to reverse the ITC (if claimed earlier) on the amount not paid to supplier in terms of Sec 16(2)||34, 16|
|7||Bill of Rs 1,00,000 + GST raised by supplier. However deduction of Rs 15,000+ GST made by receiver of service without assigning any reason||Same treatment as that of Bad Debt can be given.||Same treatment as that of Bad Debt can be given.||34, 16|
|8||Bill of Rs 1,00,000 + GST raised by supplier. However deduction of Rs 15,000+ GST made by receiver of service by assigning the reason of overcharged||The supplier can issue credit note for Rs 15,000 +GST provided this is issued before 30th Sep from end of FY or actual date of filing of Annual Return whichever is earlier.||Ideally Receiver should not have claimed ITC on Rs 15,000. However if he has claimed ITC earlier then he need to reverse the same along with Interest u/s 50.||34, 16|
So we can conclude that GST Act and Rules contains detail provisions w.r.t credit note under different scenario. The reversal of output GST liability is not allowed in all cases of credit note. Again the recipient of goods or services also need to account for credit note and reverse ITC (Input Tax Credit) in applicable cases.