It is very common in every business that issues credit notes to customers. We can see it more in the trading business. I observed confusion in the industry regarding the difference between GST credit notes and financial credit notes. And many people are thinking that issuing financial credit notes is a loss since we can adjust the GST liability if we issue a GST credit note. In this article, the author tried to differentiate both and their impact.
What is GST Credit Note?
A GST credit note is a credit note that reverses the proportionate GST tax amount along with the value of goods and services for which the credit note is to be issued. GST Credit notes should be issued only by the supplier of goods and services. However, GST credit notes can be issued only for specified instances as per Section 34. The instances are,
- Taxable value or Tax amount in the tax invoice exceeds the actual taxable value or tax amount.
- Goods supplied were returned by the customer
- Goods or services supplied were found to be deficient
One cannot issue a GST credit note if the transaction doesn’t fall under the above cases. For instances other than above, one only needs to issue financial credit notes.
The last date to adjust the tax liability against the GST credit note issued for the invoices issued during the financial year is 30th November of the subsequent financial year (i.e. in the October month GSTR). That means a GST credit note should be issued on or before 31st October of the subsequent FY. E.g., Against the tax invoices issued during the FY 2021-22, the GST credit note should be issued on or before 31st October 2023.
What is Financial Credit Note?
A financial credit note is issued only for the value of goods or services without any GST impact.
Any financial impact to the supplier or recipient between GST credit notes and financial credit notes?
No, financially there is no gain (or) no loss to the supplier, recipient, and government. The below example would help us in understanding the financial impact in the case of credit notes,
Illustration:
M/s. ABC Ltd supplied goods worth 12,00,000 to M/s. PQR Ltd in May 2022. The tax invoice is issued for Rs.12,00,000/- plus GST @18%. M/s. ABC Ltd has disclosed 12,00,000 as Turnover in GSTR-1 and paid Rs.2,16,000/- as GST Liability in GSTR-3B for the month of May 2022. M/s. PQR Ltd made the full payment of Rs.14,16,000/- to M/s. ABC Ltd and claimed GST component Rs.2,16,000/- as Input Tax Credit in GSTR-3B. At a later date, M/s. PQR Ltd returned goods worth Rs.2,00,000/- to M/s. ABC Ltd due to damages in the goods received.
In the Books of Account of M/s. ABC Ltd:
| Sale of goods | ||
| Taxable value of goods | 1 | Rs. 12,00,000/- |
| GST @18% | 2 | Rs. 2,16,000/- |
| Total Invoice value | (1+2) | Rs. 14,16,000/- |
| GST liability paid by ABC Ltd to the Government | 3 | Rs. 2,16,000/- |
| Net Income to ABC Ltd | (2-3) | Rs. 12,00,000/- |
–
| Issuing of credit note for sales returns | |||
| Particulars | GST Credit Note | Financial Credit Note |
|
| Net Income to ABC Ltd (From above) | 1 | Rs.12,00,000/- | Rs.12,00,000/- |
| Repayment to PQR Ltd for goods returned (Incl. GST @18%) | 2 | Rs.2,36,000/- | Rs. 2,00,000/- |
–
| Reduction in the GST Liability against GST Credit Note. | 3 | Rs. 36,000/- | NA |
| Net Income after adjusting Credit Note (12+3) | 4 | Rs.10,00,000/- | Rs.10,00,000/- |
In the Books of Account of M/s. PQR Ltd:
| Purchase of goods | ||
| Taxable value of goods | 1 | Rs. 12,00,000/- |
| GST @18% | 2 | Rs. 2,16,000/- |
| Total Invoice value | (1+2) | Rs. 14,16,000/- |
| Input Tax Credit availed | 3 | Rs. 2,16,000/- |
| Net Cost to M/s. PQR Ltd | (2-3) | Rs. 12,00,000/- |
–
| Receipt of credit note from M/s. ABC Ltd for Purchase returns | |||
| Particulars | GST Credit Note | Financial Credit Note |
|
| Net Cost of purchases (From above) | 1 | Rs.12,36,000/- | Rs.12,00,000/- |
| Payment received from ABC Ltd for purchase returns | 2 | Rs.2,36,000/- | Rs. 2,00,000/- |
| Reversal of Input tax Credit | 3 | Rs. 36,000/- | NA |
| Net Cost to M/s. PQR Ltd (1-2+3) | 4 | Rs.10,00,000/- | Rs.10,00,000/- |
From the above analysis, it is clear that there is no financial impact from the perspective of the Supplier, Recipient, and Government from the type of credit note.
Whether to issue a GST Credit note or financial credit note?
| Reason to issue a credit note | Type of credit note to be issued |
| Taxable value or Tax amount in the tax invoice exceeds the actual taxable value or tax amount | Supplier can choose GST credit note or financial credit note at his option |
| Goods or services supplied were found to be deficient | Supplier can choose GST credit note or financial credit note at his option |
| Goods supplied were returned by the customer | If time limit to issue GST Credit note is not expired, issue a GST credit note. *If time limit expires issue a financial credit note.* |
| In all other instances | Issue a financial credit note |
The recipient of goods returned the goods and the supplier issued a financial credit note. Is there any impact on the supplier or recipient?
The supplier doesn’t face any issues in the above cases. But the Input tax credit in the hands of the recipient can be questioned on the fact that the goods were not used in the course or furtherance of business since the goods were returned.
Any solution to avoid the risk to the recipient of goods in the above case?
Instead of returning the goods through a debit note, the recipient can issue a tax invoice for sending goods to the supplier’s premises. Recipients shall pay taxes and suppliers shall avail Input Tax Credit.
Author Bio
for current finalancial year can we issue finalcial credit note for the amount 2% without charging GST. is there any issue how it will be accounted both supplier and customer. during assessment any issue will come. pl clarify.
We are sending samples to registered customer. can we send goods under delivery challan, gst portion will be paid by ourself for both inter state/intra state is it acceptable. where gst tobe paid how it will be paid gst portion without taking itc.
sir can i raise the credit note ,if as an supplier m not paid for invoices by buyer for more then 400 days
Can a a supplier of goods issue credit notes to the buyer for downward revision of selling rates due to constant fluctuations in the market and claim reduction on output tax ?
In the example given in “What is GST Credit Note” you have mentioned that GST credit note for FY 2021-22 can be issued up to 31st Oct 2023 but FY 2022-23
will be subsequent year for FY 2021-22. Shall the date here be 31st Oct 2022 instead of 31st Oct 2023.
I sell below my purchase price due the credit not received in my financial statement received by company what to do and how to adjust my itc
Sir, what if the client has taken input already and in new FY we raise credit note
very informative article.
On which rate of GST we can issue credit note against the invoice that had issued on 12% gst before july,22. but current gst rate of that items are 18%. pls guide.
A credit note should be issued for the same rate of tax as mentioned in the tax invoice.
Sir, Upto what time we can issue GST credit note for FY 2022-23, please guide us for the same??
nice and useful article
some time party due to quality issue cut payment can we pass entry of gst credit note in year end
yes, we can pass.
sir … As we practice… seller in their SAP Accounting, need to pass credit note only and could not be allowed as receipt of material for taking ITC input credit,
Can customer ssue Tax Invoice for 2021-22 with GST….???, if we receive Tax Invoice can we eligible for taking GST credit….
Regards..
Customer can issue Tax invoice for 21-22 with GST now. The Supplier should treat it as a new purchase (as he is purchasing goods from outside) and can claim ITC.