What actions would a seller have to take if a product is returned by the buyer after generation of tax invoice?

As per section 34(1) of GST Bill, if a tax invoice has been issued for the supply of goods and the goods are returned by the recipient thereafter, the taxable entity (i.e., the supplier of goods) is required to issue a credit note with relevant details. The details of this credit note should be declared by the taxable entity to adjust tax liability. Besides draft return format (GSTR1) separately requires details of credit note issued by the supplier.

Under which scenarios would a seller be required to issue credit note for returned products?

You would need to issue credit note under the following scenarios:

  1. When a customer cancels a product before product shipment
  2. When a customer cancels a product after shipment but before delivery of the product
  3. When a customer cancels a product after the delivery of product (i.e., reverse pick-up)
  4. When the product order is cancelled by default  (i.e., return to origin (RTO))
  5. When a customer cancels a product seven days after product delivery; if you do not accept the returned product after the timeline of seven days, then you are not required to issue credit note.

How would issuing a credit note bridge the gap in invoice record when a product is returned?

As per GST Rules, tax invoices must be in consecutive series of numbers. In case of a returned product, if an invoice is simply cancelled without issuing a corresponding credit note for the return, the missing invoice would attract inspection.

Would a supplier of goods have to issue credit note for both business-to-customer (B2C) and business-to-business (B2B) transactions to adjust tax liability in case of return?

Yes, in case of both B2C and B2B transactions tax liability for sale returns will be adjusted if the supplier of goods has generated credit note with pertinent details and declared it.

For more detailed information, visit the GST portal.

GST Portal

*The guidance provided above is as per the Model GST law (released in November 2016) and draft Rules. Please refer to GST/ CBEC website for further details.