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Decoding: Tax Liability In Case Of Credit Note


A business involves various kinds of documents that are issued under different circumstances. The supply of goods or services involves essential paperwork, and required documents are presented at the various junctures of a transaction such as tax invoice, credit/debit note, bill of supply, etc. One such essential document is a credit note. Let us understand the meaning and its impact on output tax liability.

Decoding: Tax Liability In Case Of Credit Note

Meaning Of Credit Note

It is a commercial legal document, also known as a credit memo, issued by the supplier of goods and services to the recipient. This document indicates that the recipient’s accounts are required to be credited with a certain amount of money. This is an effective way to issue partial or full refunds for a taxable invoice that has already been paid or issued. The document is issued under the following situations according to GST:

  • The actual valuation of supply is less than the stated value in the origin taxable invoice
  • The amount of tax charged in the original tax exceeds the amount applicable to the supply
  • Goods are returned by the intended recipient
  • Supply of deficient or damaged goods

A credit note is supplementary to an original invoice and attached accordingly.  

Adjustment of Tax Liability 

Time Of Issuance

When the supplier sends a credit note in reference to a supply of goods or services to the intended customer, he should include all the details of it against the period (month) in which it was issued. Importantly, the declaration 

  • should not go beyond September after the financial year ends in which the supply was made or
  • the date of furnishing of the related annual return, whichever among the two is earlier.

In other words, we can say that where a credit memo is issued or put forward after September, the required output tax liability cannot be reduced.

Matching Up Output Tax Liability 

The required reduction in the supplier’s output tax liability is possible only when the credit memo is issued and gets matched properly. The following details of the credit memo of the outward supply facilitated for a given tax period by the supplier should match up with:

  • the reduction in the claim requested for input tax credits by the customer or recipient in regards to the valid return for the similar tax period or subsequent tax period.
  • and for the duplication of claims for reduction in the required output tax liability.

Further, the intended claim made by the supplier for the reduction in output tax liability should be identical to the corresponding claim for reduction in the input tax liability by the recipient. Once these details are matched properly, it is accepted formally as well as sent to the supplier. 

But in case of an event of tax and interest on such supply has been endorsed to any other individual, the reduction in the supplier’s output tax liability shall not be authorized.

Notifying Supplier and Recipient About Discrepancy

There are several cases where mismatches happen by the recipient or supplier. And the information is sent to one or both intended parties in several circumstances. The various occurrence of discrepancies:

  • when the reduction of the output tax liability about outward supplies more than the corresponding reduction for input tax credit claim, or
  • duplication in the claims for reduction in output tax liability, it should be communicated to the supplier only. And the same has not been properly addressed by the supplier by reducing output tax liability. In such a situation, the discrepancy or difference amount shall be added to the supplier’s output and the same is displayed in return for the month in which such duplication is informed.
  • amount in respect of which any sort of discrepancy is conveyed to a recipient is not duly rectified in his/her valid return for the month in which discrepancy is informed. Subsequently, the discrepancy shall be added to the supplier’s output tax liability and would illustrate in the return for the month succeeding the month in which the discrepancy is informed. 

Maintaining Records

The records of credit notes should be maintained both by the supplier and recipient until the expiry of seventy-two months period. This period commences from the date of furnishing of annual return for the period which counts post-issuance of such records and accounts. Generally, such documentation is done manually and all the documents accessible to all related places of business mentioned in the agreement of registration. Furthermore, it should be accessible to every related location of business where such documents are maintained digitally.

This is the full layout of a credit note and its adjusted tax liability, you can also take help from other resources to learn more. Thus, we can conclude that it is a legal document and a convenient way by which the value of goods in the original invoice can be revised or amended, without deleting the invoice. It helps the supplier to reduce tax liability during return filing without undertaking any complicated process of refunds.