Credit notes and debit notes under GST

Credit notes and debit notes under GST

Section 34 of the CGST Act plays a crucial role in regulating credit and debit notes in the context of goods and services.

Section 34: Credit and debit note

Section 34(1) of the CGST Act pertains to credit and debit notes. The extract of the section is provided below:

“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 one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

According to the section 34, a supplier has the option to issue a credit note with GST (referred to as “GST credit note”) on the following grounds:

1. The taxable value or tax charged on the tax invoice is found to be excessive.

2. The goods supplied are returned by the customer (sales return).

3. The goods or services or both supplied are found to be deficient (quality rejection).

The reasons for raising a GST credit note are clearly stated for points 2) and 3) above. However, point 1) is open to cover scenarios such as rate revision or discounts given, among others.

On vivisection of the Section 34(1) of CGST Act, 2017, the following are the scenarios wherein the supplier is obligated to issue Credit notes: for the following reasons: 

i. Taxable Value charged for the supply in the tax invoice is found to exceed the taxable value; 

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

iii. Goods suppliers are returned by the Recipient of the goods; iv. Goods or Services or both supplied are found to be deficient Due to the above reasons, the supplier may issue to the recipient one or more credit notes for the supplied made in a Financial Year containing the particulars as prescribed. 

The particulars to be incorporated in the Credit Notes have been notified under Rule 53(1A) of CGST Rules, 2017. The particulars to be incorporated are summarized hereunder: 

a) Name, address and Goods and Services Tax Identification Number of the supplier; 

b) Nature of the document; 

c) A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year; 

d) Date of issue of the document; 

e) Name, address and (GSTIN) Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient; 

f) Name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is un-registered; 

g) Serial number(s) and date(s) of the corresponding tax invoice(s) or, as the case may be, bill(s) of supply; 

h) Value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient; and 

i) Signature or digital signature of the supplier or his authorised representative

Time limit to issue GST credit note:

Section 34(2) provides the time limit for the supplier to issue a credit note with GST.

The extract of the section is provided below:

“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 of such supply has been passed on to any other person. “

The above provision sets a time limit for the supplier to issue a GST credit note. The GST credit note must be declared in the GST return to be filed no later than the 30thday of November following the end of the financial year. This means that the GST credit note can be included in the return for the month of October following the end of the financial year to which the corresponding original invoice pertains. In short, the timeline to include the GST credit note is the October return of the following year.

In other words, a supplier cannot declare the details of the GST credit note after the October return.

Afterwards, the supplier can issue a financial credit note (credit note without GST) to settle the accounts.

Furthermore, Section 15(3)(b) provides conditions that the supplier must fulfil to issue a GST credit note.

A GST credit note can be issued if a discount is given.

1. Before or at the time of supply by mentioning it on the invoice.

2. After the supply has occurred, provided that:

The discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to the original invoice.

The input tax credit attributable to the discount is reversed by the customer.

Section 34(1) uses the word “may” for issuing a GST credit note. Section 34(2) provides a time limit to report the GST credit note. Section 15(3)(b) imposes conditions to become eligible to raise a GST credit note on discounts.

Therefore, a GST credit note can only be issued if the conditions are satisfied by the supplier. This means that a GST credit note is conditional and not mandatory.

Time limit for issue 

However, there are practical examples where the issue of credit notes may not be possible within the time frame prescribed. E.g., in case of travel contracts for events, where a travel agent receives money against a supply to be made at the future date, issues and invoice and pays the GST as applicable. It is only after the time period under section 34 of the Act has elapsed, does the travel agent know that the contract is cancelled.