Credit notes under GST

Query

Whether credit notes issued subsequent to tax invoice are allowable as deduction under GST?

Reply: General Scheme of credit notes under GST can be discussed as under:

Credit note for discount under GST

Section 34 of the CGST Act, 2017 provides for issuance of credit note and debit note under GST. The said Section 34 is reproduced below for ready reference:

“34. (1) Where a tax invoice has 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 a credit note containing such particulars as may be prescribed.

(2) 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 September 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 on such supply has been passed on to any other person.

(3) Where a tax invoice has 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 be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed.

(4) Any registered person who issues a debit note in relation to a supply of goods or services or both shall declare the details of such debit note in the return for the month during which such debit note has been issued and the tax liability shall be adjusted in such manner as may be prescribed.

Explanation.–– For the purposes of this Act, the expression “debit note” shall include a supplementary invoice.”

Thus, as per Section 34(1), a registered person can issue credit note where the tax invoice has 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.

At this point it is relevant to note Section 15(3) of the CGST Act, 2017 which provides for discount to be excluded from value of supply. The relevant provision of Section 15(3) is extracted below for ready reference:

“(3) The value of the supply shall not include any discount which is given––


(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.”

On a plain reading of Section 15(3)(a), it is clear that value of supply shall not include any discount which is given before or at the time of supply, if such discount is duly recorded in the invoice issued in respect of such supply.

In case of post supply discount, the same shall be excluded from the value of supply under Section 15(3)(b) only if such discount is established in terms of the agreement entered into at or before the time of supply and such discount is specifically linked to relevant invoices. The recipient of supply shall be obligated to reverse the input tax credit attributable to such post supply discount.

On reading of the above provisions relating to discount and credit note harmoniously, it can be said that when supplier is providing the discount before finalisation of the sale price itself, it should mention the said discount and deduct it from the supply invoice at first instance. Since the said discount is a pre-supply discount, as per Section 15(3)(a), supplier should record the discount in the supply invoice itself.

Same analogy will apply for cash discount as well as trade discount. If the amount of discount is known at the time of issuing the sales invoice, the discount needs to be incorporated in the invoice itself and net consideration will be the value of taxable supply liable to GST.

Supplier can also raise the invoice for full amount and then he can raise the credit note for the discount under Section 34(1) as the taxable value charged in the tax invoice exceeds the taxable Value payable in respect of supply. It should be pre agreed discount.

However, while issuing the credit note, it shall be obligatory for supplier as well as the customer to ensure that the ITC to the extent of the discount passed in the credit note is reversed by the recipient.

Issuing credit note for Discount and reversing GST therein is valid under GST Law irrespective of the status of registration of the recipient (Customer).

In case of registered customer who takes set off of GST, condition of reversal under Sec 15(3) (b) must be complied.

Compliance of above condition under Sec 15(3)(b) is not applicable in case of Unregistered customer or Registered customer who do not take set off of GST, and in such cases proper documents to be kept to evidence that discount is as per agreement entered into at or before the time of supply and linked to relevant Invoice and Ledger Confirmation or corresponding debit note to be received from Customer as per documentation, as evidence of receipt of discount.

Credit note for contractual penalty / deductions

The agreement with customer may provide for penalty for delay in delivery/deficiency in goods/services. The customer may deduct the penalty from the payment made to supplier as per the terms of the agreement.

As per Section 34(1), a registered person can issue a credit note where goods or services or both supplied are found to be deficient. The credit note shall be issued in the prescribed format and against the relevant invoices.

The Credit Notes shall be reported in the return for the month in which the said credit note has been issued or any time before the September following the end of the financial year or date of filing of annual return whichever is earlier. In other words, the credit note against a particular invoice contained in one financial year shall be considered for GST adjustment and reduction in output tax liability only up to September following the end of such financial year or date of filing of annual return, whichever is earlier. For example, if a credit has to be issued against an invoice dated 31-3-2018, the said credit note has to be issued before 30th September 2018 or the date of filing of annual return.