Credit notes, debit notes and sales returns under GST, without the confusion

Goods come back. A retailer over-ordered, a carton was damaged in transit, the batch was near expiry, or the rate was wrong on the invoice.

What you raise next decides whether you get the tax back, whether your stock is right, and whether your profit for the month means anything.

Credit note or debit note

The direction confuses everyone, so here it is plainly, from the seller's point of view:

Credit note — you are reducing what the buyer owes you. Goods returned, rate charged too high, quantity billed more than delivered, or the supply was cancelled after invoicing.

Debit note — you are increasing what the buyer owes you. Rate charged too low, quantity delivered more than billed, a charge you left off.

If you are on the buying side and your supplier issues you a credit note, you do not raise anything. Their credit note is the document. Recording a matching debit note of your own is a common habit and it double counts.

The deadline that catches people

A credit note can only carry a tax adjustment if it is declared by a cut-off. The rule as it currently stands: 30 November following the end of the financial year in which the supply was made, or the date of filing the annual return for that year, whichever is earlier.

So a sale made in July 2026 sits in FY 2026-27. A credit note for it must be declared by 30 November 2027.

Past that date, you can still issue a commercial credit note. What you cannot do is reduce your output tax liability with it. You will refund the goods and keep paying the GST on a sale that came back.

This bites hardest on slow-moving returns — expiry returns in pharma, seasonal stock in FMCG — where the goods sit at the retailer for a year before anyone deals with them.

Practical rule: deal with returns in the month they happen, not in the annual clean-up.

A credit note is not a discount

A discount given at the time of supply and shown on the invoice reduces the taxable value directly. Nothing else is needed.

A discount given after the supply only reduces taxable value if it was agreed in advance, in terms established before or at the time of supply, and can be linked to the specific invoices. A post-sale volume rebate you decided on in March, with no prior agreement, does not qualify — you can pay it, and you cannot reduce your tax on it.

If you run quarterly schemes, write the scheme down before the quarter starts and reference it on the invoices. That one habit is the difference between a deductible rebate and an expensive gift.

What a return does to your numbers

Three separate things happen and they are easy to conflate:

Stock goes back up. The units return to your godown, at their cost, and become available to sell again. If they are damaged or expired they should not go back into saleable stock at all — that is a write-off, not a return.

Tax liability goes down, provided the credit note is within the deadline above.

Profit should go down. This is the one that gets missed. You booked profit when you sold the goods. If they come back, that profit was not real. A return that restocks the goods but leaves the original profit standing overstates your month.

Not every system handles the third one. It is worth knowing whether yours does, because a month full of returns can look like a good month right up until the year end.

Returns in the GST return itself

Two things worth knowing when you file:

Which table each one lands in is covered in GSTR-1: B2B, B2CL and B2CS. B2B credit notes go against the original invoice, and the recipient's credit is reduced correspondingly. Get the original invoice number right or the matching fails.

B2C returns are netted off. There is no separate document to match against, so the reduction shows up in the consolidated figures rather than as a line.

There is also a separate table for credit notes against unregistered supplies, and it only accepts certain categories — large B2C supplies and exports. A small B2C return that does not fall in those buckets is netted, not listed. If a return does not seem to fit anywhere, that is usually why.

What to do the day goods come back

1. Take them in physically and count them. Against the original invoice, not against what the driver says. Goods worth more than ₹50,000 coming back need an e-way bill of their own.
2. Decide saleable or write-off. Expired or damaged goods do not go back into stock.
3. Raise the credit note the same week, referencing the original invoice number and date.
4. Check the stock moved and the profit reversed. If only one of the two happened, you have a problem that will surface at year end.
5. Send the retailer an updated statement. A return they think happened and you did not record is a common cause of a disputed receivables balance. A return they think happened and you did not record is the most common cause of a disputed balance.

Where Dhela fits

Dhela records a sales return against the original invoice, puts saleable units back into stock at the cost they left at, and raises the credit note with the original invoice referenced so it matches when you file. Returns appear in the GSTR-1 working papers in the right table rather than needing to be remembered.

One thing it does not yet do, and we would rather say so than let you find out: a return restocks at cost but does not currently reverse the profit booked on the original sale. If your month is heavy with returns, read reported profit with that in mind.

Free plan, no card. dhela.in

General information, not tax advice. Deadlines and rules change — confirm the current position before relying on anything here.