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:
1. Business to Business Transactions (B2B Supply)
2. 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.
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 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.
In this article, we differentiate the credit note issued for B2B supply Vs B2C supply and how to deal with credit note issued under GST;
| Criteria | B2B | B2C |
| Matching mechanism | In past there is no mechanism to establish that credit has been reversed by the recipient and therefore department disallowed the reduction in tax and simultaneously recovered the input tax credit for non-reversal of input tax credit from recipient as well.
Now, the functionality/ facility of invoice management system made available on GST Portal for matching and reversal of ITC. |
Every person who has paid the tax on goods or services or both under this Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such tax to the recipient of such goods or services or both.-Sec 49(9) |
| Risk | Low | High |
| Burden of proof | The tax officers verify whether recipient has reversed the input tax credit attributable to credit note. | Sec 49(9) presumed that incident of tax has passed on unless supplier proves the contrary. |
| Discount or discrepancy in supply | Mechanism for providing evidence of compliance of conditions of Section 15(3) (b) (ii) of the CGST Act, 2017 by the supplier provide by Circular No.-212/6/2024-GST.
The supplier may procure a certificate from the recipient of supply, issued by the Chartered Accountant (CA) or the Cost Accountant (CMA), certifying that the recipient has made the required proportionate reversal of input tax credit at his end in respect of such credit note issued by the supplier Now, the functionality/ facility is made available on the common portal to enable the suppliers as well as the tax officers to verify whether the input tax credit attributable to such discounts |
The principle of unjust enrichment shall apply and burden of proof shall be on the supplier of goods or service or both.
Principle of unjust enrichment means that no one should be unjustly enriched at the expense of another. It also means that no person should take advantage of the position of another person that causes some loss to one party and gain to another party. The supplier has to established by evidence that amount of discount has been refunded to the recipient. |
| Goods supplied are returned by the recipient | The credit note, delivery challan, e- way bill and other documents can established it that goods supplied are return by the recipient. | The credit note, delivery challan, e-way bill and other documents can established it that goods supplied are return by the recipient |
| Credit note for reversal of invoice having any error & mistake | The GST law does not allowed to reversal or cancellation of invoice due to risk of revenue leakage.
Even if, GST law does not permit to issue credit note for error or mistake, we can established genuinity of transaction that; 1. The invoice has not issued to the recipient therefore recipient are not eligible to availment of input tax credit on that invoice even if invoice are communicated in GSTR-2B. 2. The recipient shall reject the invoice as well as credit note in their IMS. 3. Revised invoice evident that error or mistake was bonafide and there is no loss of revenue to exchequer. Link the payment received in bank with revised invoice. 4. Can rely on the recent SLP decision by the Hon’ble Supreme Court on 26 March 2025 in the case of ABERDARE TECHNOLOGIES PRIVATE LIMITED & ORS. [SLP (CIVIL) Diary No.6332/2025 dated 21.03.2025] where Apex court provide the relief for bonafide errors or mistake and allowed to correct clerical mistakes within “right to do business’. Issue: On rejection of credit note by the recipient, tax will be added into the liability of supplier. Risk: Department can made allegation of fraud and impose penalty for issuing of credit note without actual supply. |
The GST law does not allowed to reversal or cancellation of invoice due to risk of revenue leakage.
Even if, GST law does not permit to issue credit note for error or mistake and assumed that incidence of tax has passed on to recipient; we can established genuinity of transaction that; 1. Revised invoice has issued to the recipient and incidence of tax charges on invoice cancelled with credit note has not passed on to the recipient. 2. Link the payment received in bank with revised invoice. |
| Advance received for Service contract got cancelled |
In several instances, new customers engaged with the company but subsequently requested a refund, leading to the issuance of credit notes.
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” in terms of section 34 of the CGST Act. He shall declare the details of such credit notes in the return for the month during which such credit note has been issued. The tax liability shall be adjusted in the return subject to conditions of section 34 of the CGST Act. There is no need to file a separate refund claim. |
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Conclusion: It can be conclude that credit note can be issue in restricted manner as per section 34 of GST Act,2017. The credit not issued to B2B are matching with the reversal of input tax credit by the recipient which can be verified by the GST officer, however where credit note issued to unregistered person, the burden of proof is on the supplier of goods to prove that incident of tax has not passed on to the recipient.
Author Bio
i am in business
in my GST acct ledger
i have credit in credit ledger account.
i want to get refund from credit ledger account which is accumulated in past year.
i tried to get from inverted system but not getting back.
can you please advise.
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