Article on Credit Notes under GST v/s Commercial Credit Notes: The Ambiguity Among Taxpayers

Credit Notes under GST v/s Commercial Credit Notes: The Ambiguity Among Taxpayers

The issuance of credit notes to the customer is a very common practice in every business. Under GST the provisions of credit notes are governed by section 34 of CGST Act 2017. Instead of issuance of credit notes under GST, sometimes the commercial credit notes or financial credit notes are also issued by the supplier. Accordingly, there is always ambiguity among the taxpayers regarding the difference between GST credit notes and financial /commercial credit notes. In this article we will discuss the difference between credit notes issued under GST and commercial/financial credit notes and also discuss when the supplier should issue credit notes under GST and when commercial credit notes should be issued by the supplier.

Credit Note under GST:

Section 34 of CGST Act 2017 states that where one or more tax invoices have been issued and the taxable value or tax charged in that tax invoice is found to exceed the actual taxable value or tax payable or where the goods supplied are returned by the recipient or where goods or services are found to be deficient, the supplier may issue to the recipient one or more credit notes and declare the details of such credit note in the return for the month during which such credit note was issued but not later than 30^th November following the end of the F.Y in which such supply was made or the date of furnishing of the relevant annual return, whichever is earlier.

However no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

Thus we can say that the credit notes under GST can be issued under the following circumstances:
(i) Taxable value or tax amount in the tax invoice exceeds the actual taxable value or tax amount.
(ii) Goods are returned by the customer
(iii) Goods or services supplied were found to be deficient

However, sometimes the supplier gives quantity discounts or year end discounts to the recipient and issues the credit note to the recipient. In such cases as per section 15(3)(b)(ii) of CGST Act 2017 the said discount is not to be included in the taxable value if following conditions are fulfilled:

(i) such 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

(ii) ITC as is attributable to the discount has been reversed by the recipient of the supply.

In this respect the CBIC has also issued Circular No. 212/6/2024 wherein it was clarified that as there is no system functionality/ facility presently available on the common portal to enable the supplier or the tax officer to verify the compliance of the said condition of proportionate reversal of input tax credit by the recipient, accordingly it was clarified that the supplier should obtained from the recipient a CA /CMA certificate where the amount of tax of such credit notes in a F.Y exceeds Rs 5,00,000/- and if the amount is less than 5,00,000/- in such situation the supplier should obtain an undertaking/certificate from the recipient that ITC attributable to such credit notes have been reversed by them.

Commercial/Financial Credit Note:
The commercial or financial credit notes are outside from the scope of GST. In case of commercial credit notes, no tax liability is to be reduced by the supplier in their GST returns. Hence the recipient is also not required to reverse their ITC in respect of commercial credit notes issued by the supplier. When the supplier issues a commercial credit note to the recipient he just pass an entry in the books of accounts and reduced the balance of the account of the recipient.

Whether to issue a GST Credit note or commercial credit note:
The decision whether a GST credit note is to be issued or commercial/financial credit note is to be issued, is at the option of the supplier as per their understanding with the recipient. If the GST credit note is issued by the supplier in such a situation the supplier has to do e-invoicing of the same (if e-invoicing is applicable to him) and the tax liability of the supplier would be reduced to the extent of credit note and similarly the ITC of the recipient would also be reduced to that extent and if the credit notes are issued in case of discount then the supplier has to obtain CA/CMA certificate or an undertaking (as the case may be) from the recipient that ITC has been reduced by the recipient.

On the other hand if the supplier chooses the option to issue a commercial credit note, in such situation neither the liability of the supplier would reduce nor the recipient has to reverse the ITC.

In respect of the GST credit notes and Commercial Credit notes, there is always ambiguity among the taxpayers that issuing a commercial credit note is a loss since no output tax liability is adjusted, however if the supplier issues a GST credit note then he can adjust the GST liability. However, it is important to know that irrespective of the credit note issued by the supplier there would be no financial impact on the supplier, recipient and the Government. This can be proved with the help of the following example;

Suppose Mr.A has sold the goods to Mr.B having value of Rs. 5,00,000/- and charged GST @ 18 % i.e., Rs. 90,000/- and issued a tax invoice of Rs. 5,90,000/-. Mr. A disclosed Rs. 5,00,000 as taxable value in GSTR-1 and paid Rs.90,000/- as GST Liability in GSTR-3B. Mr. B made the full payment of Rs. 5,90,000/- to Mr. A and claimed ITC of Rs. 90,000/- in GSTR-3B. At a later date, Mr. B returned goods worth Rs.1,00,000/- to Mr. A due to damages in the goods received.

In such situation the Net income of Mr.A would be as follows;
At the time of sale:
Taxable value of goods sold to Mr.B : 5,00,000
GST charged in invoice @ 18% : 90,000
The said GST collected from Mr.B would be paid to the Government. Accordingly, net income of Mr.A would be Rs. 5,00,000/-

At the time of sale return:
(i) If GST credit note is issued by Mr.A:
In this situation Mr.A would issue a credit note having taxable value of Rs. 1,00,000/- and charge GST @ 18 % i,e., 18,000/-. Accordingly the liability of Mr. A would be reduced by Rs. 18,000. The net income of Mr.A would be;
Net income at the time of sale (A) : 5,00,000/- (as calculated above)
Payment to be made to Mr. B for sale return (B) : 1,18,000/-
Reduction in the liability of Mr.A due to GST credit note issued (C): 18,000

Net income of Mr.A (A-B+C) : 4,00,000/-

(ii) If commercial credit note issued by Mr.A:
In this situation Mr.A has to make payment of Rs. 1,00,000/- to Mr.B for sale return and net income of Mr. A would be:
Net income at the time of sale (A) : 5,00,000/- (as calculated above)
Payment to be made to Mr. B for sale return (B) : 1,00,000/-
Net income of Mr.A (A-B) : 4,00,000/-

Thus from the above it is clear that net income of Mr.A would remain the same i.e., 4,00,000/- irrespective of the credit note issued by him.

Similarly the net expense of Mr.B would be as follows;
At the time of purchase:
Mr.B has to make payment of Rs. 5,90,000 to Mr.A and ITC of Rs. 90,000/- would be claimed by Mr.B. Hence the net expense of Mr.B would be Rs. 5,00,000/-

At the time of sale return:
(i) If GST credit note is received from Mr.A:
In this situation Mr. B would receive Rs. 1,18,000 from Mr.A and would reduce ITC of Rs. 18,000/- .Hence the net expense of Mr.B would be:
Net outflow at the time of purchase (A): Rs. 5,00,000/-
Amount received from Mr.A (B) : 1,18,000/-
ITC to be reduced (C): 18,000/-
Net outflow of Mr.B (A-B+C): 4,00,000/-

(ii) If commercial credit note is received from Mr.A:
In this situation Mr. B would receive Rs. 1,00,000 from Mr.A. Hence the net expense of Mr.B would be:

Net outflow at the time of purchase (A): Rs. 5,00,000/-
Amount received from Mr.A (B) : 1,00,000/-
Net Outflow of Mr.B (A-B) : 4,00,000/-

Thus from the above it is also clear that net outflow of Mr.B would remain the same i.e., 4,00,000/- irrespective of the credit note received by him.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.