A quick guide to a credit note

Last Updated on July 21, 2024 by Nasir Hanif

What does a credit note mean?

A credit note is a document that one party issues to another mentioning that the former credits someone else’s account in his books. A credit note is issued by a supplier to a buyer when there is a credit on the buyer’s purchase invoice. This typically happens when the taxable value of the goods that have been supplied has decreased. This value may decrease for any number of reasons such as defects in the quality of the product or any tax deduction available to the buyer. The credit note is demanded by law and serves an essential business function.

It is not necessarily a refund as such but simply allows you to receive products from the same supplier later without paying for them.

Circumstances which warrant the issue of a credit note

According to section 34(1) of the CGST Act, if a tax invoice needs to be corrected to decrease the tax liability, then the supplier would need to issue a credit note.

Note: A tax invoice is mandatory in the case of a GST registered supplier and it could be paid through a UPI QR code generator. Click here for more info.

Following are some of the common situations which may require credit note issues:

1. If a buyer gets a discount post-sale
2. If the goods are returned either due to problems with the product or rejection of the service entirely.
3. Earlier invoice incorrectly mentioned higher charges or the buyer paid a higher amount than required
4. The quantity of the goods received is less than the amount mentioned in the invoice
5. If pending payments are cancelled against the invoice

Is there a time limit to issue the credit note?

No time limit is prescribed for issuing a credit note or a debit note. However, the same should be disclosed in the GST returns filed for the month in which the credit or debit note was issued. The maximum time limit for this disclosure in the returns is fixed by GST law. Hence as per the law, you should declare it on the following dates, whichever of the two comes earlier:

• 30th September in the year next to the one in which the supply was done.
• The date on which you file the annual returns for that year.

Following fields are mandatory in a credit note:

1. Name of the business
2. Address of the business
3. GSTIN of the supplier
4. Type of the document (debit note/credit note)
5. Unique serial number
6. The date on which the document was issued
7. Taxable value
8. Amount of tax credit for the buyer
9. Signature of the supplier

To create a credit note you can either use an invoice creation software or do it manually in excel or word