Credit Note Under GST: Key Changes from the 55th GST Council Meeting

What is a Credit Note Under GST?

A credit note is issued by a supplier to adjust the taxable value or tax charged in the original invoice in specific circumstances. This document is vital for maintaining transparency and compliance within the GST system.

Common Reasons for Issuing a Credit Note:

• Overvaluation: When the declared value exceeds the actual value of goods or services.
• Excess Tax Charged: If a higher tax rate than applicable was charged.
• Quantity Discrepancy: When the recipient receives fewer goods than invoiced.
• Quality Issues: If goods or services are deficient or unsatisfactory.
• Other Adjustments: Any other circumstances requiring reimbursement.

Upon issuing a credit note, the supplier’s output tax liability is reduced, provided the recipient correspondingly adjusts their input tax credit (ITC).

Mandatory Details in a Credit Note

While GST law does not mandate a specific format, a credit note must contain the following details:

Adjustment of Tax Liability

To adjust tax liability, the supplier must declare the credit note in their GST return for the month it is issued. However, this must be done no later than:

• 30th November following the end of the financial year, or
• The date of filing the annual return, whichever is earlier.

The supplier’s output tax liability is reduced only if the recipient reduces the corresponding ITC. Any discrepancies lead to a process of matching and rectification.

Matching and Rectification Process:

• Matched Claims: The supplier’s liability reduces when the recipient reduces ITC proportionately.
• Unmatched Claims: Discrepancies are communicated to both parties for resolution.
• Duplicate Claims: These are added back to the supplier’s tax liability.

Amendment to Section 34(2) of the CGST Act, 2017

The 55th GST Council Meeting introduced a significant amendment to Section 34(2), which now explicitly mandates:

• The recipient must reverse ITC attributable to a credit note before the supplier can reduce their output tax liability.

Implications of the Amendment:

• For Suppliers: Reduction in output tax liability depends on the recipient reversing the ITC.
• For Recipients: Recipients must take action (accept/reject) through the Invoice Matching System (IMS).
  • If Accepted: The supplier’s liability reduces, and the recipient’s GSTR-2B reflects the adjustment.
  • If Rejected: The supplier’s liability increases in the next GSTR-3B.

Example: Practical Illustration

Original Invoice Details:

• Taxable Value: ₹1,00,000
• GST (18%): ₹18,000
• Total: ₹1,18,000

Credit Note Details:

• Reduction in Taxable Value: ₹10,000
• GST: ₹1,800
• Total Credit Note Value: ₹11,800

Recipient’s Action: Reverse ITC of ₹1,800 in their GST return.

Supplier’s Action: Reduce output tax liability by ₹1,800 upon recipient’s ITC reversal.

Time Limit for Record Retention

Credit note records must be retained for 72 months from the due date of filing the annual return for the financial year to which they pertain. These records should be easily accessible and maintained digitally or manually as per business needs.