Nov 172018
 

Detailed analysis of credit notes and debit notes under GST

Meaning of terms Financial credit notes:

A taxable person may issue a credit note reducing the value of original supply without tax attributable to the reduction claimed. Such credit notes are referred as ‘financial credit notes’.

When financial credit note is issued by a supplier, it would adjust turnover of the original supply and hence the revenue recorded in the books of accounts. However, such credit note would not be declared in the returns under the GST law.

Introduction to Credit Note and debit notes under GST:

In terms of Section 34 of the CGST / SGST Act, 2017 the supplier of goods and / or services is permitted to issue credit notes and debit notes in very specific situations which is summarized in the following manner:

Credit notes Debit notes
taxable value or tax charged in the tax invoice is found to exceed the taxable value or tax payable.  taxable value or tax charged in the tax invoice is found to be less than the taxable value or tax payable.

 

 

Goods supplied are returned by the recipient.
Goods and / or services or both supplied are found to be deficient.
Pre-agreed discount given after issue of invoice subject to conditions.

Situations where credit note can be issued:

  1. Reducing taxable value or tax payable on an earlier supply.
  2. Reducing the taxable value without affecting the tax involved in the amount of such reduction, i.e., financial credit notes
  3. Verify the fact that whether credit notes issued are correctly reported in GSTR 1, it would leave a trail for verification and compliance in due course.

Impact of financial credit notes in annual returns:

There would be difference in revenue as per the audited annual financial statements and the turnover reckoned for purpose of GST returns.

The value of such credit notes should be declared against Pt. II Sl. No. 5J as ‘credit notes accounted for in the audited Annual Financial Statement but are not permissible under GST’.

This Pt.5J goes to increase the revenues as appearing in the audited financial statements (minus of a negative value would be a plus).

It is concluded from the above that credits notes not admissible under GST will attract incidence of GST. And for this reason, it is not advisable to issue such credit notes that omit to adjust the tax involved in the reduction sought to be made to the  value of original supply.

Impact of GST credit notes on Annual return:

The credit notes issued under the provisions of Section 34 viz., mentioning the value of taxable value and the tax payable thereon as well is not required to be declared in the reconciliation statement in Form GSTR – GSTR 9C  for the reason that such credit note would have already been declared in the monthly returns / annual returns.

Situations under which the financial credit notes are issued:

  • Discounts offered post supply: The discount issued by the supplier after effecting supply of goods and / or services if not in terms of the provisions as specified under Section 15(3) of the CGST / SGST Act, 2017, the supplier cannot claim the reduction in the output tax
  • Credit notes issued in relation to exempt supplies, zero-rated supplies and non-GST outward supplies Credit notes issued for claiming reduction in the taxable value shall be declared against Pt. II No. 5J of Form– GSTR 9C.
  • Credit notes issued after expiry of the time limit specified under the GST law: In terms of Section 34 of the CGST / SGST Act, 2017, a supplier cannot issue a credit note any time after either of the following 2 events:
    • Annual return has been filed for the FY in which the original tax invoice was issued; or
    • September of the FY immediately succeeding the FY in which the original tax invoice was issued (i.e., for a tax invoice issued in April 2018 as well as a tax invoice issued in March 2019, the relevant credit notes cannot be issued after September 2019;

Compliances and treatment of financial credit notes: The financial credit notes issued by a taxable person should not be declared either in the monthly returns filed in Form GSTR 3B or outward supply statement filed in Form GSTR – 1 since, it does not involve adjustment of output tax payable. This infers that the financial credit notes would also not be declared in the annual return filed in Form GSTR – 9.  In as much as the reconciliation statement in Form GSTR 9C is concerned such financial credit notes may be required to be declared for the reason that the value of credit notes are given effect in the revenue of the audited annual financial statements. Therefore, such credit notes whether issued in terms of Section 34 or otherwise, should be declared against  Pt. II of Sl. No. 5J of the Form GSTR 9C.