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Published on:

August 28, 2024

Udeetta Sarma

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Explore GST

Basics of GST

‍What is a Credit Note?

In business, companies regularly need to amend invoices because items are returned or due scope issues (being under-charged) and trade discounts apply. This is exactly the reason why you will probably need a credit note. So, what exactly is a credit note and how does it work under India's GST regime? Well, let us dissect it and how to use.

‍Credit Note Meaning

A credit note is issued to say that the customer's account has been credited with a certain amount of value. This usually takes place when the original invoice released requires a major change of some kind. The credit note is used in several situations, such as to correct services listed on an invoice issued by the seller and return goods that could not be previously invoiced.

Credit Note in GST

Credit notes are issued as per the procedure under the GST regime in India. For a business GST-compliant credit notes must make sure they adjust their tax liabilities accurately and keep away from any discrepancies in the taxation returns.

When is a Credit Note Issued?

This can be done in various ways, but typically is with a credit note;

1. Return of Goods

For writing off that account (which a separate column has been allotted), buyer will send the goods back to seller then credit note is prepared in case.

2. Correction note

If you make a mistake in the original invoice, either by reducing pricing or improper stock quantity, so issuing a credit note would rectify it.

3. Discount Post sale

If a discount should be given after the sale and the original invoice, then a credit note is used to settle the account.

4. Service Cancellation

A credit note can be used to adjust the account balance concerning the cancellation of services provided or not availed by the customer.

How to Make a Credit Note

It is very simple to create a credit note. And now if you are generating a credit note for the GST, below is an easy step-by-step guide

1. Original Invoice Reference

Write the invoice number for which this credit note is issued This will keep your name crystal clean.

2. Buyer and seller information

Both buyers also have seller details like Name and address along well their GSTIN interface.

3. Credit Note Number & Date

A unique serial number identifying the credit note should be entered and the date of issuance must also be mentioned in such tax invoice.

4. Goods/Services Description

Enter the description of goods or services for which a credit note is being issued This type of information includes the number, price per unit and total forests.

5. Purpose

Describe why you are issuing the credit note; due to goods return, invoice error or other discount.

6. GST Means

The prevalent GST rates and their respective amounts are being adjusted.

7. Signatures

The credit note has to bear the signatures of the authorized signatory on behalf of the issuing business.

‍Credit Note Example

For example, if goods worth ₹50,000 are sold by ABC Traders to XYZ Pvt. Ltd. under Invoice No 123, and later, XYZ Pvt. Ltd. returns ₹10,000 worth of damaged goods, ABC Traders should issue a credit note as follows

Original Invoice Number 123
Buyer's GSTIN 27AAAPL1234C1Z1
Seller's GSTIN 27BBAPL1234D1Z2
Credit Note Number CN-001
Date 29th July 2024
Description Return of Non-conforming Goods
Amount ₹10,000
GST Rate 18%

The GST breakup of 18% on ₹10,000 is as follows

Integrated GST Amount ₹1,800

Total Credit Note Amount ₹11,800

This credit note will be used to debit the accounts of the buyer by ₹11,800 for both goods returns and GST.

Benefits of Using Credit Notes

1. Credit notes ensuring proper accounting

Credit Notes also assist the business in making a reflection of genuine obligations owing on the front book.

2. Transparency

They provide a thoroughly transparent transaction for both the buyer and seller by documenting everything.

3. Compliance

GST-registered companies are required to issue credit notes under the Act as a measure of compliance which is directly linked with how timely your tax returns reflect accurate figures.

Conclusion

Knowing about Credit Notes is essential for businesses to manage their GST tax credit correctly. The Credit notes will enable you to refund or pay the customer in form of store credit. The advantage of this is that it keeps your accounts realistic and complies with the GST rules utilising credit notes is critical to ensure that the operations of your business are seamless and transparent. Keeping things clear and easy going between you and your customers.

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FAQ

1. What is a credit note?

A document issued to adjust the value in a buyer's account due to returns, overcharges, or discounts.

2. When is a credit note issued?

A credit note is basically a way to adjust or refund a customer's account.

3. How to Create a Credit Note under GST?

Including reference of the original invoice, buyer and seller details, credit note number & date description, reasons for issuing a new GST Details Authorized signature

4. What are the benefits of using credit notes?

It guarantees accounting in compliance with the specified laws & transparency, GST compliant.

5. Can you give an example of a credit note?

Let’s say ABC Traders sold goods to XYZ Pvt. for ₹50,000. XYZ Pvt. returns goods worth ₹10,000 (including GST) to ABC Traders. ABC Traders then issues a Credit Note of ₹11,800 (including GST) to XYZ Pvt. to refund the amount.