Summary: Exporters facing the return of goods after claiming an IGST refund encounter a significant GST hurdle. While a credit note under Section 34 of the CGST Act might seem a logical solution to adjust the initial tax liability, GST law explicitly prohibits this practice. Once the IGST refund on exported goods is disbursed, the tax liability is considered settled. Issuing a GST credit note to reduce the taxable turnover and tax liability post-refund creates a mismatch, potentially leading to refund reversals or tax demands with interest. Furthermore, GST credit notes are designed for transactions between taxable entities within India, rendering them inapplicable to foreign buyers who are outside the GST purview and do not claim Input Tax Credit (ITC) or file GST returns. Instead of a GST credit note, exporters should issue a commercial credit note for accounting purposes, treat the returned goods as a re-import by filing a Bill of Entry and paying applicable customs duties and IGST, and subsequently claim ITC on the import IGST if the goods are used for further taxable supplies. Maintaining a clear audit trail linking export documents, refund records, the commercial credit note, and the Bill of Entry is crucial for compliance. The GST framework treats zero-rated exports as final upon refund processing, necessitating adjustments for returned goods to occur outside the GST return mechanism through customs and accounting procedures.
Exporters today face a practical yet complex issue under GST: Goods are exported with payment of IGST, the refund is claimed and credited — but later, the buyer abroad returns the goods due to damage, rejection, or commercial reasons.
The question naturally arises:
Can I issue a GST credit note under Section 34 of the CGST Act, 2017 in this situation?
While the instinct may say “yes”, the law firmly says “no” — and this article will explain why in clear terms, supported by law, CBIC circulars, and practical guidance.
The Real-World Scenario
Let’s say you export ₹10 lakhs worth of goods to a buyer in the US. You pay ₹1.8 lakhs IGST (18%) on export, file GSTR-1 and GSTR-3B, and claim refund from ICEGATE. A few weeks later, the buyer returns the goods due to quality issues.
You now want to cancel that invoice using a credit note and adjust the tax liability. Sounds logical — but here’s where GST law intervenes.
What Does the Law Say?
Section 34(1) of the CGST Act, 2017:
“Where a tax invoice has been issued and the taxable value or tax charged exceeds the actual value or tax payable… the supplier may issue a credit note.“
Section 34(2):
“Such credit note must be declared in the return for the month it is issued, but no later than 30th November following the financial year.“
So, in normal cases, a credit note can be used to reduce outward tax liability — but this logic breaks when a refund has already been claimed.
Why a GST Credit Note Cannot Be Issued in This Case
Here are the 4 key reasons why issuing a GST credit note after claiming IGST refund on exports is legally and practically not permitted:
IGST Refund Already Disbursed = Tax Liability Closed
Once you’ve received the refund, the government has already settled your tax claim.
Issuing a credit note reduces taxable turnover and tax liability, creating a mismatch between your actual tax paid and refunded amount.
This can trigger refund reversal or demand with interest under Section 73 or 74.
Section 34 Is Not Designed for Zero-Rated Recipients
GST credit notes are meant to adjust liability with a taxable recipient under GST.
But your foreign buyer is outside the purview of GST. There’s no mechanism to reflect the credit note on their side — making it legally meaningless in the GST system.
Circular No. 37/11/2018-GST (CBIC Clarification)
This circular explicitly clarifies:
“Where refund has been claimed on a supply, issuing a credit note under Section 34 to adjust tax liability is not allowed unless the refund is reversed.“
That means the only way to issue a credit note is to voluntarily reverse the refund, which is administratively complex and often not practical.
No ITC Claim or GSTR-2 Impact for Buyer
Since the buyer is a foreign entity, they are not claiming ITC or filing GST returns. The entire credit note mechanism — meant for reconciling tax between supplier and recipient — serves no purpose here.
So, What Should You Do Instead?
Here’s a step-by-step guide on the correct treatment when exported goods are returned after refund has been claimed:
Step 1: Issue a Commercial Credit Note (Non-GST)
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This is purely for accounting and commercial reconciliation.
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Do not upload this credit note in GSTR-1.
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Mark the document clearly as:
“Commercial Credit Note – Not for GST purposes”
Step 2: Treat the Return as a Re-Import
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File a Bill of Entry at the time of return.
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Pay applicable Customs Duty and IGST on the import value.
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Goods are re-entered into inventory as fresh inward stock.
Step 3: Claim ITC on IGST Paid at Re-import
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If the goods are used for further taxable supplies, you are eligible to claim ITC of IGST paid at the port, subject to conditions under Section 16 of CGST Act.
Step 4: Maintain Clear Audit Trail
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Link the export invoice, refund records, commercial credit note, and Bill of Entry.
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Maintain reconciliation for auditors and the GST department to explain why no GST credit note was issued.
Example Breakdown
| Component | Value |
|---|---|
| Export Value | ₹10,00,000 |
| IGST Paid | ₹1,80,000 |
| Refund Received | ₹1,80,000 |
| Goods Returned | After 2 months |
| GST Credit Note Issued? | Not allowed |
| Commercial CN Issued? | Yes |
| Re-import IGST Paid | ₹1,20,000 |
| Eligible ITC on Import | Yes |
Summary Table: Do’s and Don’ts
| Action | Permissible? |
|---|---|
| Issue GST Credit Note under Section 34 | No |
| Issue Commercial Credit Note (Non-GST) | Yes |
| Reverse IGST refund voluntarily via DRC-03 | Technically yes, but not practical |
| Claim ITC on IGST paid on returned goods | Yes |
| Adjust returned exports directly in GST returns | Not allowed |
When goods are returned by a foreign buyer after IGST refund has been claimed, the only legally compliant approach is to:
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Avoid issuing a GST credit note, and instead
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Issue a commercial credit note and treat the return as a fresh import.
The GST law is built on the principle that zero-rated exports are final once refund is processed. Adjustments after refund must happen outside the GST framework, using customs documentation and accounting entries — not tax returns.
Author Bio
Rule 96B provides that in case of non-realisation of export proceeds within prescribed time limit as per FEMA, refund is required to be paid back with interest. But by not issuing the credit not with GST the ITC balance will not be increased which was reduced while uploading the original invoice with payment of IGST.