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.
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
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:
According to the Harmonized System Nomenclature Service Accounting (HSN SAC) codes, a credit note should include the following details:
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:
Also Read: Impact of GST on Personal Loans
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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Here’s how you can issue this document:
Since it is also called a credit memorandum, its short form is ‘credit memo’.
It is a soft copy of the credit invoice issued by the supplier.
The seller or supplier issues the credit memo or note to the buyer to amend the original invoice.
In double-entry bookkeeping, sellers will debit the credit memo under revenues but credit it in the buyer’s account or accounts receivable.
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.
