Traders who deal with taxable goods and services have to issue a tax invoice for their buyers. This tax invoice acts as a liaison between the goods and services sold by the company and the consumer of the product. Sometimes, situations arise where the invoice needs changes. This alteration of the invoice can occur due to several unprecedented reasons. It is the credit notes which solve those unforeseen predicaments.

Credit notes in GST

After the Indian government implemented the GST act from the year 2015, suppliers had to issue an invoice before conducting any transaction with the buyers. During the transaction, several unanticipated events happened for which the buyer returns the product or the seller cancels the transaction. In such cases, suppliers cannot issue a tax invoice because according to the GST rule once an invoice is issued it cannot be nullified. Hence, what a purveyor does is issue credit notes. Credit notes act as an acknowledgement receipt between the two parties. It also apprises the buyer that the goods or services which have been returned have been recorded and credit has been issued for it.

Example of a credit note

As an example, we can consider Bunnel Ltd. a registered distributor from Mumbai who supplied goods worth rupees 100000/- to another registered customer Vulpix and Co. who resides in the same city. The same day Bunnel Ltd. issued a tax invoice which was paid by their customer Vulpix and Co. Later on, Vulpix and Co. found out that some of the goods were not up to the mark for which they decided to return the goods. Therefore, goods worth rupees 40000/- were returned for which Bunnel Ltd. had to issue a credit note regarding the amount of the goods and the GST charged on them.

The issued credit note will act as evidence of the fact that the equivalent amount of goods have been returned by the customer which in turn will reduce the amount of liable tax for the buyer. The amount corresponding to the product returned is to be credited to the buyer’s account.

Circumstances under which credit notes can be issued

Under the rule of GST act, credit notes can be issued when the following situation arises:

• The amount mentioned in the tax invoice is greater than the original value of the goods and services.
• When the taxable amount that needs to be paid against the product or service is higher than the actual value.
• If the quality of the product received is deteriorated than the authentic one, then the buyer is liable for a partial or full refund which can be done after issuing a credit note.
• Customer returns the goods or product for any other similar cause.

It is also to be noted that you cannot delete a tax invoice. Credit notes can be attached to an existing tax invoice or you can generate them separately, you can also use them against any other invoice in the near future.

Credit note format

Following details need to be put forward while generating a credit note:

• The supplier’s name, address and GSTIN (Goods and Service Tax Identification Number).
• Document Type (credit note)
• Name, address, GSTIN or Unique ID number of the buyer if registered.
• Name, address, address of the delivery point, state and Pincode number of the receiver.
• Date and invoice number of the tax invoice.
• Value of the products and taxable amount.
• Date of issue of the credit note
• Unique and consecutive serial number of 16 digits.
• Signature of the supplier.

To reduce all the confusion that occurs during the accounting period, traders need to make use of credit notes whenever the situation calls for. So please keep in mind the importance of credit notes and use them wherever applicable.