Intricacies involved in a ‘Credit Note’ under the GST law

I. Erstwhile Service Tax provision and VAT laws

Service tax provision

Under the erstwhile service tax provisions (Finance Act, 1994) Rule 6(3), a service provider could take credit of excess service tax paid if the refund was given to the person from whom the payment was received or by issuance of a credit note. A credit note under the service tax provisions could be issued under the following circumstances:

  1. Invoice has been issued or payment has been received against a service to be provided which is not so provided either wholly or partially for any reason;

  2. Where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract.

There was no time limit prescribed within which credit note had to be issued under the service tax provisions. Support can be drawn from the following case laws

  1. Aakash The Palace To Celebrate 2013 (31) S.T.R. 251 (Tri. – Ahmd.)

  2. Central Mine Planning and Design Institute Ltd. 2014 (36) S.T.R. 328 (Tri. – Del.)

State Value Added Tax Law

The issue relating to issuance of credit notes under the erstwhile State Value Added Tax laws (for brevity, ‘VAT laws’) was contentious. Under the erstwhile VAT laws credit notes could be issued under the following circumstances:

  1. Sales return if the goods are returned within 6 months of date of sale or date of delivery of goods (State specific);

  2. Post sales discount with certain conditions which varied from State to State.

The issue relating to deduction from total turnover in respect of post-sale discounts given through credit note under the Karnataka VAT Act, 2003 in the case of Southern Motors vs. State of Karnataka 2017 (1) TMI 958 – Supreme Court was held as an eligible deduction

“the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid.”

In the case of IFB Industries Ltd 2012 (3) TMI 66 – Supreme Court, the Hon’ble Apex Court held as follows

“Kerala General Sales Tax Rules, 1963 – allowability of discount provided vide credit notes under rule 9(a) – Revenue contended that discount to qualify for exemption must be shown in the invoice itself – Held that:- We find nothing in rule 9(a) to read it in the restrictive manner to mean that a discount in order to qualify for exemption under its provision must be shown in the invoice itself. It is significant to note that the rule stipulates that the discount must be shown in the accounts.”

II. Central Goods and Services Tax Act, 2017 (CGST Act, 2017)

  1. Credit note:Credit note is defined under Section 2 (37) of the CGST Act, 2017 to mean a document issued by a registered person under Section 34 (1) of the CGST Act, 2017.

  2. Issuance of credit note:Section 34 (1) of the CGST Act, 2017 provides that a registered person can issue one or more credit notes where one or more tax invoices have been issued for supply of goods or services or both in a financial year under the following circumstances:

    1. “Taxable value” or “tax charged” in a tax invoice is found to exceed the taxable value or tax payable in respect of supply effected.

    2. Goods supplied are returned by the recipient.

    3. Goods or services or both supplied are found to be deficient.

    Section 34(1) of the CGST Act, 2017 makes it mandatory that every credit note must be inextricably linked with an underlying tax invoice/tax invoices issued for “such supply”. Under the GST law, Section 34 of the CGST Act, 2017 also makes it abundantly clear that a credit note (or a debit note) can be issued only by the supplier (registered person) who has issued tax invoice/s. Credit note or debit note issued by recipient of supply of goods or service do not carry any legal support as far as GST law is concerned.

    Section 34 of the CGST Act, 2017 does not mention the phrase ‘post supply discount’ for issuance of credit note. A question arises as to whether a credit note can be issued for post supply discount, in case where “post supply discount” fulfills the conditions specified under section 15(3) (b) of the CGST Act, 2017. In this context the author’s view is that the post supply discount will fall under the phrase ‘taxable value or tax charged in a tax invoice is found to exceed the taxable value or tax payable in respect of supply effected’ and thus issuance of credit note in case of post supply discount is possible (only upon satisfying conditions prescribed under Section 15(3) (b) of the CGST Act, 2017).

  3. Additional conditions:As per Section 34(2) following conditions are to be followed where credit note is issued in relation to supply of goods or services or both:

    1. All the credit notes issued during a month should be declared in the return (currently Form GSTR 3B and Form GSTR 1)

    2. Credit note/s for a financial year cannot be issued later than September following the end of the financial year in which the supply of goods or services or both is made. For instance, credit note in respect of supply made during the financial year 2018-19 can be issued not later than September 2019. The time limit is linked with “time of supply” which may not necessarily coincide with “date of tax invoice”, hence, one has to be careful with regard to “time of supply” against which credit note is required to be issued.

  4. Post supply discount: Section 15 (3) (b) of the CGST Act, 2017 provides that value of supply shall not include discount given after supply is effected, if the following conditions are fulfilled:

    1. 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

    2. 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.

    In case of post supply discount as discussed supra, a credit note can be issued.

    The condition in Section 15 (3) (b) (ii) of the CGST Act, 2017 requiring the ‘supplier to ensure that 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’ appears to be very onerous on the supplier. In this context the analogy of the judgement of the Hon’ble Andhra Pradesh Court in the case of Media Communications (1997) 105 STC 227 (AP) is useful for discussion. In this case one of the question raised was whether the requirement under Section 12(2)(b) of the Andhra Pradesh General Sales Tax Act, 1957 for contractor to prove that the turnover of the sub-contractor was included in the return of turnover filed by the sub-contractor to claim deduction from the turnover was valid; the Hon’ble High Court held as follows

    “In the present case also once it is found that a sub-contractor is compulsorily registrable, we fail to see any further purpose in requiring the contractor to prove that the turnover of the sub-contractor was included in the return of turnover filed by the sub-contractor. That information will be only with the sub-contractor and it could also be easily verified from the records of the taxing authority since the sub-contractor is registered and his registration number will be known. To require that the contractor should also show that the sub-contractor’s turnover was returned by the sub-contractor appears to be an unreasonable burden on the contractor. We are, therefore, of the opinion that the words “and that the turnover of such amount is included in the return of turnover filed by the sub-contractor” must be struck down as unreasonable”.

Based on the analogy of the above judgement, whether the conditions imposed in Section 15 (3) (b) (ii) of the CGST Act, 2017 (i.e. requiring the supplier to ensure that 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) will hold the test of law will have to watched. Further, in author’s view, supplier issuing credit note can take support that he has uploaded the credit note/s in Form GSTR1 and to that extent it would get displayed in Form GSTR 2A of the recipient which would be sufficient compliance under Section 15(3) (b) (ii) of the CGST Act, 2017.

Further, it would be relevant to the note the Advance Ruling in the case of Ultratech Cement Limited 2018 (7) TMI 1761 – Authority for Advance Rulings Maharashtra in the aspect of the condition laid down in Section 15(3)(b) ‘discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices’; in this ruling the Hon’ble Authority held as follows

“The discount from the value of supply can be allowed only if discount is in compliance of the provisions of Section 15(3) of the CGST Act, 2017 – the discount that is given after the goods have been sold has to be established in terms of the agreement entered into at or before such supply i.e. the discount that is to be given afterwards has to be mentioned in the terms of the agreement or the criteria for arriving at the quantum or percentage of discount has to be given in the terms of the agreement which is entered into at or before such supply.

The wordings of Section 15 (3) (b) (i) very clearly states that quantum of discount is given after the supply of goods has taken place has to be there in the terms of such agreement i.e. it cannot be open ended not based on any criteria. Thus, this discount quantum cannot be arrived at without any basis only at the discretion of the supplier. The supplier has to clearly mention the quantum of discount or percentage of discount which is to be worked out on the basis of certain parameters or certain criteria which may be agreed to between the supplier and the recipient and which are predetermined and mentioned in agreement in respect of supply of the goods.”

  1. Contents of credit note: A credit note to be issued under Section 34 of the CGST Act, 2017 should contain all 15 particulars prescribed in Rule 53(1A) of the CGST Rules, 2017.

  2. Single credit note with multiple invoice numbers: During the implementation of GST law, a separate credit note had to be issued for each invoice. Vide Notification No. 03/2019 – Central Tax dated 29.01.2019 effective 01.02.2019, a single credit note with multiple invoice numbers can be issued. However, as on date, to the best of author’s knowledge the online facility for filing the application Form GSTR 1 does not provide the option of linking a single credit note with multiple invoices. Thus, until this facility is activated on the GST portal, it would be prudent to issue a separate credit note for each invoice.

  3. Some issues on credit notes

    1. Goods supplied during a financial year are returned after September following the end of the financial year (for instance, goods supplied on February 14, 2019 are returned on December 15, 2019). Can a credit note be issued in terms of Section 34 of the CGST Act, 2017?

      A credit note under Section 34 of the CGST Act, 2017 in the instant case cannot be issued. However, a credit note under the normal accounting principles without the tax (CGST/SGST or IGST as the case maybe) can be issued. Reconciliation statement in Form GSTR 9C Table 5J requires disclosure of ‘Credit notes accounted for in the audited Annual Financial Statement but are not permissible under GST’.

    2. A recipient of service denies to pay to the supplier of services who has issued a tax invoice. The service has been provided by the supplier wholly without any deficiency in service deliverables. As the service recipient has denied the payment, the service provider has decided to write off the said tax invoice (or even a part of the tax invoice). Can the service provider issue a credit in terms of Section 34 of the CGST Act, 2017?

      Credit note for service can be issued if there is deficiency in provisions of service. In the instant case as the service provided are not deficient, credit note under Section 34 of the CGST Act, 2017 cannot be issued.

    3. Whether credit note can be issued under Section 34 of the CGST Act, 2017 even if the conditions laid down in Section 15(3) (b) of the CGST Act, 2017 are not fulfilled?

      Circular No. 92/11/2019-GSTdated 07.03.2019 in para 2(D) (iii) has clarified that ‘financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.’

In conclusion, while issuing a credit note under Section 34 of the CGST Act, 2017 abundant caution is to be taken and ensure that all the conditions are adhered as prescribed in GST law.

An attempt has been made in this article to make a reader understand the basics of Credit Note under the GST law. This article is written with a view to incite the thoughts of a reader who could have different views of interpretation. Disparity in views, would only result in better understanding of the underlying principles of law and lead to a healthy debate or discussion. The views written in this article is as on May 12, 2020

Posted in May.

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