Credit Notes and Discounts in GST: Critical Issues

Rajat Mangla Gaurav Giri

(Chartered Accountant) (Article Assistant)

Shyam Sunder Mangla & Co. LLP

Chartered Accountants
What follows in next slides are our opinions
and not to be treated as legal advice or facts.
What is a Credit Note?

• In Simple terms, any adjustment to the amounts already invoiced to customers is

done either through credit note or debit note.

• Increase is done through debit note and decrease through credit note.

• Goods are also returned by customer through this document.

Credit Notes in GST

• Defined in Section 34(1) of CGST Act,2017

Scenarios in which it is allowed:

⮚ Value or tax mentioned is in excess of what should have been

⮚ Where the goods supplied are returned by the recipient

⮚ Where goods or services or both supplied are found to be deficient

Debit Notes in GST

• Defined in 34(3) of CGST Act,2017

Scenarios in which it is allowed:

⮚Value or tax mentioned is in excess of what should have been

Procedure to issue Credit Notes

• Mentioned in Section 34(2) of the CGST Act, 2017

• Declare the details of such credit note in the return for the month during
which it has been issued;

• But not later than the 30th day of November following the end of the
financial year in which such supply was made, or the date of furnishing of
the relevant annual return, whichever is earlier.
Procedure to issue Credit Notes

Section 34(2) of the CGST Act, 2017 provides procedure to REPORT the
credit note already prepared.

Does it provide a timeline for event warranting issue of credit note to

occur?
Does it restrict adjustment of tax liability in case reporting is done after
Nov 30?
Reporting of Credit Notes

Governed by Sec 37(1)

“Details” of outward supply to be furnished electronically
by 10th of next month.
As per Sec. 37(3), errors or omissions to be rectified not
later than 30th Nov of next year.
But what if Credit note itself has been issued in Dec
2023?
Procedure to issue Credit Notes

This provision can be understood with a simple scenerio.

For example:
If the supply was made in the Financial Year 2022–2023, and the credit
note is issued in June 2023, provision requires the reporting of the credit
note in the return to be filed for the month of June 2023 or to be filed
before 30th November, 2023.

Any error in disclosure to be also corrected till Nov 2023.

Procedure to issue Credit Notes

Situation 2:

• Supply was made in Mar 2023 and goods were returned to supplier on 30th
December 2023.
• In this case we can’t expect supplier to issue credit notes before 30th November.

• Such a credit note would require reporting in GSTR 1 under Section 37(1) and
will not be governed by the timelines prescribed for reporting by 30th November.
Procedure to issue Credit Notes

In earlier scenario

• There was omission that credit note issued was not reported in
GSTR-1 in prescribed time limit but

• if the credit note itself is issued in December, it cannot be said that

such credit note is governed by timeline prescribed in section 34. i.e.,
30th November.

• As section 34(2) merely prescribes a timeline for reporting of the said

credit notes and not regarding issuance of new credit notes.
Can credit note be issued after 30th November of next
financial year?

What provisions say:

⮚ Section 34(1) permits the issuance of a credit note upon satisfaction of the
prescribed conditions.

⮚Section 34(2) merely prescribes a timeline for reporting of the said credit notes
and not regarding issuance of credit notes.
Credit Notes in GST

• Defined in Section 34(1) of CGST Act,2017

Scenarios in which it is allowed:

⮚ Value or tax mentioned is in excess of what should have been

⮚ Where the goods supplied are returned by the recipient

⮚ Where goods or services or both supplied are found to be deficient

Various other Scenarios:

• An invoice for supply of goods issued to customer A, Maharashtra.

However, before delivery, supplier was asked to issue an invoice to his
Gujarat registration.

• An invoice for supply of goods has been issued to customer A, though the
goods have been delivered to customer B. The invoice issued to customer
A is, therefore, required to be cancelled by issuing a credit note, and a new
invoice is to be issued to customer B.
Various Other Scenarios:

• An airline issues a ticket (which is treated as a tax invoice) for a future air
travel.

However, before the travel, the passenger cancels the ticket resulting in no
supply taking place.

• Flat booked by customer is cancelled by him before taking the delivery.

Whether the supplier has an option to issue a credit note for the
cancelled invoices and generate a fresh invoice for other
supply?
Can credit note be issued in case of cancelled supply?

Section 34 permits the credit notes only in specific scenarios.

• And invoice cancelled subsequently is not covered under the situations
specified in Section 34.

• Possibility that department can claim that the option of issuing a credit note
to rectify the mistakes in case of cancelled supply is not available
Can credit note be issued in case of cancelled supply?

• Under Rule 6(3) of Service Tax Rules, 1994, which specifically permitted
issuance of credit note in specific cases. The said rules provided as under:

• Where an assessee has issued an invoice, against a service to be provided

which is not so provided by him either wholly or partially for any reason ,
the assessee may take the credit of such excess service tax paid by him, if
the assessee,—

• [has issued a credit note for the value of the service not so provided to the
person to whom such an invoice had been issued.]
Can credit note be issued in case of cancelled supply?

Similar Provision missing in GST

How to deal with Cancelled Supply

• In such cases, a taxable person always has an option to claim non-liability

to pay tax on the grounds that there is no supply being made.

• When no underlying supply takes place, there is nothing in the law that
authorise the collection and payment of a tax on a supply which is not
affected.

• Reference of Circular 188/20/2022- GST can also be taken

Cancelled Supply in case of Real estate
Transactions

In the context of real estate transactions where cancellation of contracts take

place,

• Board has issued Circular 188/20/2022-GST permitting the recipient to

claim refund of tax paid on cases involving deficient supplies or
cancellation of supplies.

• Circular at para 4.4 clarifies that in case the time limit prescribed u/s 34
has not lapsed, the supplier can issue a credit note to the recipient and
adjust the tax amount against his other liability
Credit notes in case of exports

Exports have been granted a beneficial treatment even under the Goods and
Services Tax (GST) legislation. Exports are 'zero rated supplies’.

While exporting goods/ services, an exporter has the following options:

• Export goods/ services or both under a bond or letter of undertaking (LUT)
without payment of tax
• Export goods/ services or both with payment of GST.
Credit notes in case of exports

• When export is done without payment of Tax under LUT the exporter give
an undertaking to make the payment of tax if the export proceeds are not
realised within the prescribed period (generally one year from date of
export)

• Rule 96A requires payment of integrated tax to the extent payment is not
realised on export transactions.
Problems while issuing Credit note in case of
export

• Whether issue of credit note be treated as reduction in amount receivable

from foreign buyer?

Or

• It will be treated as non-compliance of condition of Rule 96A, 2017,

resulting in a denial of claim of export of services to that extent.
RBI Circulars to Rescue

To provide relief to the exporters,

RBI has issued RBI FED Master Direction No. 16/2015-16 dated 1st
January, 2016

• Any exporter who has not been able to realise the outstanding export dues
despite best efforts may either self-write off or approach the authorised
dealer for write-off of such export bills.

• The maximum amount of unrealised export proceeds that can be written-

off is 10% of total export proceeds realised during the previous calendar
year.
Conclusion:

• When FEMA rules itself allow write-offs, and no time limit

mentioned in Sec 2(6) of IGST Act, rule 96A prescribing the same
is ultra vires the act.
ITC in case of Import of Goods

The import of goods or services into India is regarded as a supply falling within the
purview of interstate trade.

• To provide context, let’s took an example:

If an imported good has an assessable value of Rs. 600, basic customs duty is 10%,
and the integrated tax rate is 18%, the tax computation is as follows:

Assessable Value = Rs. 600

Basic Customs Duty = Rs. 60
Value for the levy of integrated tax = Rs. 600 + Rs. 60 = Rs. 660
Integrated Tax = 18% of Rs. 660 = Rs. 118.80
ITC in case of Import of Goods

• Bill of entry is the document issued at custom, which includes the

computation of GST liability to be paid by the recipient during import of
goods.

• ITC is claimed based on bill of entry filed with commercial invoice issued
by the supplier, which thereafter reflects in GSTR-2A under import tab.
Reversal of ITC in case of credit note issued by
foreign supplier

In case of foreign supplier,

• ITC is claimed based on bill of entry filed with commercial invoice issued
by the supplier,

• Hence consequential credit note cannot be issued u/s 34 by the foreign

supplier.

• Since such a credit note cannot have any GST implications

Reversal of ITC in case of credit note issued by
foreign supplier

• Moreover, there is also the support to claim that the issuance of a credit
note does not result in failure to pay tax, hence the question of any
consequential impact on ITC should not arise.
Timing to Reverse ITC

When should the assessee reverse ITC

on credit note?
It can be understood with simple example-

Case - Credit Note issued by supplier in April 2022, Reported in

GSTR-1 in September 2022, and recipient accounts the same in
December 2022 in books.

• In this case recipient came to know about credit note in

December 2022.

Whether ITC must be reversed in Apr 2022? or Sep 2022? or

Dec 2022?
Timing to Reverse ITC

• If Sep 2022 is correct, whether taking Input is

allowed merely on reflection of ITC in GSTR
2A?
Timing to Reverse ITC

• There can always be a timing difference in case of issuance of a credit note

by the supplier and its accounting by the recipient and there is no specific
provision regarding timing for ITC reversal.

• Therefore tax period in which the credit note is received by the recipient is
the appropriate trigger for reversing the ITC.
Case Laws
Luminous Power Technologies (P.) Ltd.
V/S
State Tax Officer

High Court of Madras

Facts of the Case

Petitioner dispatched goods to buyer by four different invoices - Goods also

accompanied e-way bills

• Goods were not received by buyer as goods got wet due to heavy rain - Goods
were re-transported back by petitioner after generating e-way bills

• According to Roving Squad, no Credit Note issued for return of goods that was
being re-transported back to petitioner's factory.
Petitioner’s Point

• Detention was incorrect, as the consignee namely Attrib System, refused to

take delivery. Therefore, issuance of Credit Notes under section 34 of the
respective GST enactments does not arise.

• Issuance of Credit Note would arise, only after delivery is taken and the
goods are thereafter returned, whereas, in this case there was no delivery as
the consignee/buyer refused to take delivery of the goods.
Court’s Order and Conclusion:

• Goods which are being returned need not necessarily accompany a Credit
Note.

• The Credit Note or Debit Note as the case may be are intended only for
adjustment of tax liabilities.
Credit Notes in case of Discounts

In case of Discounts
Supplier can issue two types of credit note,

• Credit Notes u/s 34(1) which results in reduction of his outward tax
liability.

• Financial / commercial credit note which does not have any impact on his
outward tax liability.
Whether ITC reversal is required on discount by
supplier

Different stands taken by Department previously,

• Reverse the ITC claimed on such purchase.

• Treats such discounts as consideration received for supplies and demands

GST.
Whether ITC reversal is required on discount by
supplier

Financial/commercial credit notes

• The recipient will be eligible to take ITC of the original amount of tax paid by
the supplier.

Credit note u/s 34

• Supplier has issued a credit note u/s 34, it will result in a reduction in the
value of supply for both the parties, and therefore, even the recipient will have
to reverse the claim of ITC.
Important Points to consider

• Issuance of a credit note results in reduction in the consideration payable

by the recipient to the supplier.

• In the case of a credit note, when the supplier himself has agreed to receive
a lower amount, the question of the amount being due to that extent does
not arise.

• In the case of Malaysian Airlines vs. UOI [2010 (262) E.L.T. 192 (Bom.)]
wherein it has been held that failure to pay means non-payment when
amount is due.
Case Laws for Reference

• The AAAR, Tamil Nadu in the case of MRF Limited held that a
proportionate reversal of the credit is not required to be done in case of a
post purchase discount given by the supplier to recipient, as these discount
were settled through commercial credit notes only.

• It is further held that the appellant M/s MRF Ltd can avail the Input Tax
Credit of the full GST charged on the undiscounted supply
So in the nutshell, it is clarified that recipient is not required
to reverse the Input Tax Credit (ITC) claimed on the original
invoice in cases where post-sale discounts are received
through financial/commercial credit notes.
Whether Recipient of Discounts liable to discharge
GST

• The discounts/incentives which are purely financial benefits provided to the

recipient for reasons such as meeting targets, early payment, or bulk purchases, as
discussed earlier.

• There is no activity or service other than the purchase of goods involved in these
transaction. So GST should not be applicable on such discounts/incentives as they
do not qualify as a supply of goods or services under the GST
Case Laws for Reference

In case of RAJESH KUMAR GUPTA Order No. 1 of 2022 with Case No.
07 of 2021, decided on 6-1-2022( AAR Madhya Pradesh)

• It was held that Incentives received is in the form of discount and GST is
not payable on cash discounts and incentives received through Commercial
credit notes without GST adjustment from supplier
Case Laws for Reference

In case of Kwality Mobikes(P.)Ltd., GST 105 (AAR - Kar.)

• It was held that the Volume Discount received on purchases in the form of
credit note without any adjustment of GST (Commercial/Financial Credit
Notes) is not liable for GST.
Case Law
 Supreme Paradise
V/s
Assistant Commissioner

High Court of Madras

Facts of the case

• Impugned order passed holding that tax liability to be paid by petitioner on

discounted value of supply provided by petitioner.
Petitioner’s Point

• GST was levied and paid on entire invoice amount, which included volume
discount.

• Petitioner had not deducted volume discount for GST levy purpose and
invoice value including GST was paid to vendor supplier, hence assessee
did not need to pay further tax on volume discount.
Respondent’s Point

• Discount on the value of supply can be allowed only in the cases specified
in Section 15(3) GST enactments.
• Section 15(3)(b) of the respective GST enactments state that value of
supply shall not include any discount, which is given after the supply has
been effected, if-
(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
(ii) input tax credit as is attributable to the discount on the basis of document
issued by the supplier has been reversed by the recipient of the supply.
Court’s Order and Conclusion

• A further sale or supply of goods or services by recipient of such goods or

services at a discounted price cannot form part of transaction value of such
recipient/seller.

• GST is levied and paid on the entire invoice amount, which includes
volume discount.

• Impugned order was to be quashed

 Thank You
CA Rajat Mangla
Shyam Sunder Mangla & Co LLP

SCO 201, Shopping Center, Sector 8, Faridabad, Haryana

[email protected]
#9654850434