Credit Note: Its use, components and other important details

Businesses issue a GST credit note under special circumstances that allow them to correct any discrepancies in bills and invoices. It helps businesses maintain their account books without any discrepancies. Issuing credit notes is more convenient than reissuing new invoices, making them more favourable. 

Read on to know the meaning of a credit note, its format, steps, procedure and more. 

What is a GST Credit Note?

These are documents issued by sellers to adjust the amount of goods supplied in the original invoice. Sellers or suppliers issue this tax invoice in acknowledgement of a debt invoice raised by their buyer. 

Sellers can use the credit memo to adjust the amount in future transactions instead of discarding the original invoice and creating a new one. This way, it becomes easier for them to track their transactions and maintain the balance in their books. 

Suppliers can also issue a credit note to amend the GST liability of the original invoice. In this case, it can also be referred to as a GST credit note. A credit note also reduces the customers’ liability since they will get a discount or refund in the future. 

To understand how a credit note works, here’s an example. Suppose you made a purchase worth ₹1 lakh, out of which ₹20,000 worth of products get damaged during the delivery. If you have already made the full payment for the goods, then you must ask for a refund. 

After the supplier reviews the invoice, they will issue a credit memo that promises to refund or adjust the amount in future purchases. So, the next time you buy goods, you can get ₹20,000 off your billing amount by providing the credit note issued by the seller. 

Also Read: What is GST? Important points to know

5 Uses of a Credit Note 

Businesses can issue this document under Section 34(1) of the CGST Act 2017 to amend the tax liability of a tax invoice that has already been issued. Here are some instances where suppliers can issue a credit note: 

• If the amount on the invoice was more than the payable amount
• If the buyer returns the goods, in case of quality issues, damage, pilferage or delivery of the wrong item 
• If the invoice did not account for discounts 
• If any pending payments against the invoice are cancelled
• If the buyer received less quantity than what is mentioned in the invoice

GST Credit Note Format

According to the Harmonized System Nomenclature Service Accounting (HSN SAC) codes, a credit note should include the following details: 

• Name of the buyer and the supplier
• Address and GSTIN of the buyer and the supplier
• Nature and type of document
• Serial number of up to 16 characters and date of issue
• Quantity, rate amount and tax applied on the goods
• Net taxable amount
• Supplier’s or their representative’s signature

Steps to Generate a Credit Note

Issuing and generating this document is fairly easy once you identify the error in the original invoice. Once done, here is what you need to do to create this note: 

• Step 1: Confirm that you are eligible to issue a credit note as per the GST rules
• Step 2: Choose a credit memo template 
• Step 3: Add the business and original invoice reference number 
• Step 4: Add the date and unique credit memo identification number 
• Step 5: Add value, quantity, description and other details from the original memo
• Step 6: Calculate the new amount by deducting the value of the goods from the original amount 
• Step 7: State the reason for issuing the document clearly
• Step 8: Provide a copy to the recipient and save one for future reference
• Step 9: Revise your GST returns as needed and pay any adjusted tax amount, if necessary.

Also Read: Impact of GST on Personal Loans

Debit Note vs Credit Note in GST

Similar to a credit note, sellers can also issue a debit note, which helps them adjust tax liabilities and invoice value for the opposite reason. Check this table to know how they differ:

Basis of Difference	Debit Note	Credit Note
Issuance	When the taxable value in the original invoice is less	When the taxable value in the original invoice is more
Tax Liability of Buyer	Increases the tax liability of the buyer	Decreases the tax liability of the buyer
Credit Adjustment	It requests a credit adjustment to the account of the seller	It requests a credit adjustment to the account of the buyer

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FAQs on Credit Note

How do you write a credit note?

Here’s how you can issue this document:

• Step 1: Verify you can issue the note as per the GST rules
• Step 2: Pick a template for the credit note
• Step 3: Provide your business details and original invoice number
• Step 4: Add the date and a unique credit memo number
• Step 5: Enter details of the goods from the original memo
• Step 6: Compute the new invoice value 
• Step 7: Provide the reason behind issuing the document
• Step 8: Provide a copy to the recipient and keep one for yourself
• Step 9: Update your GST returns and pay the extra tax if needed

What is a credit note in short form?

Since it is also called a credit memorandum, its short form is ‘credit memo’. 

What is a credit note PDF?

It is a soft copy of the credit invoice issued by the supplier. 

Who gives a credit note?

The seller or supplier issues the credit memo or note to the buyer to amend the original invoice. 

What is a credit note in a balance sheet?

In double-entry bookkeeping, sellers will debit the credit memo under revenues but credit it in the buyer’s account or accounts receivable.

What is a credit note in GST with example?

It’s a document that a GST-registered supplier issues to the buyer to adjust or reduce the liability in the original tax invoice due to errors or omissions.

For example, suppose a supplier initially charges a buyer ₹50,000 on a tax invoice but later realises an overcharge of ₹2,000 as GST. To rectify this error, the supplier will issue a credit note of ₹2,000 to the buyer.