Credit notes and Debit notes under GST

Introduction: In the world of GST (Goods and Services Tax), credit notes and debit notes play a crucial role in ensuring accuracy and compliance in tax invoicing and accounting practices. These documents are issued to adjust discrepancies in the original tax invoices, either by reducing or increasing the taxable value or tax payable. Understanding the circumstances under which these notes can be issued and their implications is essential for businesses to maintain transparency and avoid penalties.

Background- A credit note under GST is a document issued by a supplier to the recipient in cases where the taxable value or tax charged in the original tax invoice exceeds the actual taxable value or tax payable.

Whereas, A debit note under GST is issued by the recipient to the supplier in cases where the taxable value or tax charged in the original tax invoice falls short of the actual taxable value or tax payable. It increases the tax liability of the supplier.

Circumstances under which credit note can be issued under GST?

1. Taxable Value charged for the supply in the tax invoice is found to exceeding the taxable value as per agreement.

2. Tax charged in the invoice is found to exceed the tax payable in respect of such supply.

3. Where the goods supplied are returned by the Recipient of goods.

4. Where goods or services or both supplied are found to be deficient.

Circumstances under which debit note can be issued under GST?

1. Taxable Value charged for the supply in the tax invoice is found to short/ less value than as per agreement.

2. Tax charged in the invoice is found to reduce the tax payable in respect of such supply.

Who Can issue credit note/debit note?

Original supply of Goods / Service or both is made by the supplier, therefore correction related to upward / downward value of Supply or Taxes thereon has to be issued by the Supplier only

Relevant provision of the CGST Act 2017 is as below,

Sec 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 1[one or more credit notes for supplies made in a financial year] containing such particulars as may be prescribed.

 (3) 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 be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient 1[one or more debit notes for supplies made in a financial year] containing such particulars as may be prescribed.

Therefore, any credit notes or Debit notes is required to be issued under the GST, same has to be issued by the Supplier only not by recipient.

However, for accounting purpose,

1. Credit note issued by the Supplier, will become Debit note for recipient (As the account of Supplier is debited to give the effect of Credit note issued by him), and

2. Debit note issued by the Supplier, will become Credit note (As the account of Supplier is credited to give the effect of Debit note issued by him).

And effects of the GST can be given in the books of recipient in form of ITC.

What is the Time limit for issuing credit note?

– relevant provision Sec 34(2) of CGST Act 2017.

With respect to the supply made during the any financial year credit note, should be issued not later than,

1. The 30 November following the end of the financial year in which such supply was made, or

2. The date of furnishing of the relevant annual return,

Whichever is earlier, and the tax liability shall be adjusted (downward), by the time limit as mention above.

I.e., The credit note relating to the invoices for FY 2023-24 can be latest issued up till October 2024 and reported by (any return filed till) 30 Nov 2024.

What is the Time limit for issuing Debit note?

As on the date, there is no time limit for issuance of Debit note, so debit note for upward revision of Taxable Value or taxes thereon can be issued at any time either in form of Debit note/ Supplementary Invoice.

Is there any specific clarification issued by the CBIC for credit notes related issues?

1. Expiry Stock return.

In case of expiry stock for Pharma Industry, and related movement of Goods from retailer to Wholesaler manufactures, CBIC issued Circular No. 72/46/2018 –dated 26 Oct 2018.

As per the circular, Credit note can be issued by the retailer /Wholesaler /manufactures for return of Expiry stock, however if the credit note is issued within time limit as mentioned in Sec 34(2), then adjustment of outward tax liability can be done by Manufacturer / Wholesaler/ retailer. subject to the condition that the person returning the time expired goods has either not availed the ITC or if availed has reversed the ITC so availed against the goods being returned.

Further if the time limit specified in sec. 34 (2) of the CGST Act has lapsed, a credit note may still be issued by the supplier for such return of goods but the tax liability cannot be adjusted by supplier.

2. Credit note for Discounts including “Buy more, save more” offers (CBIC Circular no Circular No. 92/11/2019 dated 07 March 2019)

Some suppliers also offer periodic / year ending discounts to their stockiest, 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”.

In such cases discounts offered by the suppliers to customers 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 said 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.

3. Secondary Discounts (After sale discount)- CBIC Circular no Circular No. 92/11/2019 dated 07 March 2019)

Discounts which are not known at the time of supply or are offered after the supply is already over. Generally, this kind of discount is based market forces and demand supply rule.

In case of Secondary discounts, if the conditions of sec 15(3)(b) of the CGST Act 2017 are not satisfied, financial / commercial credit note(s) can be issued by the supplier further such secondary discounts shall not be excluded while determining the value of supply as discounts are not known at the time of supply and the conditions laid down in section 15 (3) (b) of the said Act are not satisfied and There is no impact on availability or otherwise of ITC in the hands of supplier in this case.

4. Secondary or post-sales discounts (Circular No. 105/24/2019 dated 28 June 2019)

Post-sales discount granted by the supplier of goods is not permitted to be excluded from the value of supply in the hands of the supplier as the conditions laid down in section 15 (3) (b) of the said Act are not satisfied.

If the additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer.

This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer, for the purpose of arriving value of supply.

However, this circular is withdrawn vide Circular No. 112/31/2019 dated 03 Oct 2019. Therefore, same is not in operation / effective.

5. Issuance of Credit note for GST paid advance on Service contract which subsequently got cancelled (Circular No. 137/07/2020 dated 13 April 2020)

In case GST is paid by the supplier on advances received for a future event which got cancelled subsequently and for which invoice is issued before supply of service, the supplier is required to issue a “credit note” as per Sec 34(1), provided condition are fulfilled and The tax liability shall be adjusted in the return. There is no need to file a separate refund claim.

However, in cases where there is no output liability against which a credit note can be adjusted, registered persons may proceed to file a claim under “Excess payment of tax, if any” through FORM GST RFD-01.

In summary, credit notes and debit notes under GST are vital for ensuring accuracy and compliance in tax invoicing and accounting practices. They facilitate the adjustment of tax liabilities and help maintain transparency and accountability in business transactions. Compliance with GST regulations regarding the issuance and treatment of credit and debit notes is essential for businesses to avoid penalties and ensure smooth operations.

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Disclaimer: The information in this document is for educational purposes only and nothing conveyed or provided should be considered as legal, accounting or tax advice. User is advised to apply his/her analytical skills before implementing any or all the suggestions above. The suggestions are given, keeping in mind the present legal position.