Goods & Services Tax (GST) in IndiaCredit Note under GST

INTRODUCTION

The term ‘Credit Note’ in its simplest sense means a commercially binding document issued by the Supplier in order to notify the Customer regarding the application of credit to the Customer. A Credit Note can be issued wherein a Customer has either returned the goods or has rejected the services rendered due to any genuine reason, the goods in question were damaged, the Customer mistakenly overpaid as compared to the original price, goods and services were found to be deficient.

Generally, the Supplier mentions the products, quantity as well as the agreed price of the goods and services as requested by the Customer. The original invoice remains the reference along with the genuine reason for the Credit Note. The Credit Note may entitle the Customer either money or the same can be applied for the future purchases.

The concept of ‘Credit Note’ is dealt under the Central Goods & Services Tax Act, 2017 (the ‘CGST Act’) and is elaborately discussed hereunder.

FEATURES OF CREDIT NOTE

Some of the salient features of a Credit Note are listed below:

1. It is used to inform the Customer regarding the credit made in his account along with the reasons.
2. It facilitates in the efficient book keeping of sales records.
3. It is generally made in cases where there is certain defect in the goods and services given by the seller.
4. As a general rule, a Credit Note often denotes a negative amount.
5. The primary reason for issuance of a Credit Note by the Seller reflects that there would be no full reimbursement of the amount paid by the Customer in lieu of the goods and services.

CREDIT NOTE UNDER THE CGST ACT

According to Section 2 (37) of the CGST Act, a Credit Note can be defined as ‘a document issued by a registered person under sub-section (1) of Section 34’. Section 34 deals with the concept of Credit note under the CGST Act.

Section 34 (1) of the CGST Act provides for various reasons and circumstances in which the Supplier issues a Credit Note, viz wherein one or more tax invoices are raised against a Customer and the tax charged exceeds the tax payable or the taxable value or goods or services supplied have been found deficient.

Further, Section 34 (2) of the CGST Act prescribes the format and the procedure required to issue a Credit Note. As per this provision, any registered person who may issue a Credit Note with regards to the goods supplied or services rendered or even both, must affirm the details of the Credit Note in the return for the month in which it was issued.

However, it cannot be issued beyond September following the end of the financial year in which the said goods or services were supplied or the date of providing the appropriate annual return, whichever is earlier.

Furthermore, there is a proviso attached with Sub-section (2) i.e. no decrease in the Supplier’s output tax responsibility shall be authorized if the tax and interest effect on such supply has been passed on to any other person.

With regards to the format, there is no prescribed format of the Credit Note. However, there are certain essential ingredients that a Credit Note must have. Some of them are, name along with the address as well as the Goods and Services Tax Identification Number (‘GSTIN’) of the Seller, nature of the document, a periodic serial number of up to sixteen characters in length, in one or more series, containing alphabets, digits, or special characters respectively, distinctive for a financial institution, and any combination thereof for the said financial year, date on which the note was issued, name along with the address of the customer etc.

ADJUSTMENT OF THE TAX LIABILITY [SECTION 34(2)]

In accordance with Section 34 (2) of the CGST Act, one cannot reduce the output tax liability in circumstances wherein the Credit Note was issued after September. Once the Credit Note is provided and matched, the supplier’s output tax liability is reduced. Furthermore, specifications of the Credit Note for outward supplies provided by the seller must be matched throughout the tax period with the below mentioned two criteria:

1. Firstly, with a subsequent decrease in the recipient’s claim for Input Tax Credit (‘ITC’) along with his valid return for the same or any subsequent tax period, and;
2. Secondly, regarding claims for reductions in output tax liability that are duplicated.

The disparity must be disclosed to both the parties if the decrease in output tax liability in respect of outward supplies exceeds the equivalent reduction in the claim for ITC or if the corresponding Credit Note is not stated by the Recipient in his valid returns.

The amount so communicated in respect of any discrepancy that is not rectified by the Recipient in his valid return for the month in which the discrepancy is communicated is added to the Supplier’s output tax liability in his return for the month following the month in which the discrepancy is communicated.

Therefore, the amount of any reduction in output tax liability discovered to be due to claim duplication is added to the Supplier’s output tax liability in his return for the month in which the duplication is disclosed.

AMLEGALS REMARKS

The introduction of the new tax filing system was indeed complicated and novel than that of the previous one, however, it arose from the demand to make the process of completing regular tax returns as straightforward and easy as feasible. Credit Notes are an important part of the invoicing process, but they are not frequently used, making them a little tricky to understand. It becomes vital to issue Credit Notes in order to make the invoicing system transparent for both parties.

In view of the provisions as discussed above, it may be understood that Credit Note is a document issued by the Seller in order to reduce the tax liability that was higher than the prescribed.

Moreover, credit-debit notes are still relevant under GST when it comes to reporting in GST returns. It is an undeniable fact that the Credit Note is a quick and legal way to change or adjust the value of the products or services in the original tax invoice. The issuance of the Credit Note will allow the Supplier to reduce his tax due in his returns without having to go through a time-consuming refund process.

Furthermore, it would not be wrong to say that a Credit Note is used to alter or revise the original tax invoice in order to reduce the tax burden. Therefore, it can be inferred that by providing the concept of ‘Credit note’ or ‘Debit note’, the CGST Act contains several rules in regard to the time of issue and content of invoices, as well as provisions where the invoice is under-valued or over-valued.

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For any query or feedback, please feel free to connect with chaitali.sadayet@amlegals.com or aditi.tiwari@amlegals.com.