Credit note for sales returns

Last reviewed: October 2026

Sales return: credit note or debit note?

Both, depending on which side you are on. The seller records a sales return with a credit note: it credits the customer's account and reduces sales. The buyer records the same goods as a purchase return, and many buyers send the supplier a debit note to claim the amount back, because it debits the supplier's account in their books.

How to make a credit note for returned goods

1. Business and customerEnter your business and the customer exactly as on the original invoice, with both GSTINs; they decide IGST or CGST + SGST, as they did on the invoice.
2. Returned goods onlyAdd one line per returned item with the quantity that came back and the rate per unit from the invoice. Put the HSN code in the description.
3. Same GST rateKeep the GST rate of the original invoice line, even if the rate has changed since; the credit reverses the tax actually charged.
4. Invoice, return and settlementIn the notes, give the original invoice number and date, the date the goods arrived and your GRN number. In the terms, say whether you will refund or adjust against the next invoice.
5. Sign in to issueSigning in numbers the credit note in your CN series, posts the sales return and the tax reversal, and lines it up for GSTR-1. Issuing and sending need the Sales module.

Example: a partial return between two states

Patel Seating Systems in Ahmedabad sold 40 mesh chairs to Nimbus Interiors, a Delhi furniture retailer, on invoice INV/2026-27/0342 at ₹7,450 a chair plus 18% IGST (Gujarat to Delhi is inter-state). Six chairs had faulty gas lifts and came back. Patel inspects them, records a goods received note, and credits the six chairs only. The invoice for the other 34 stands.

1. Original invoice number and date: the credit note reduces this invoice and no other.
2. Proof of return: the date the goods arrived and your goods received note (GRN) number.
3. Reason: sales return, with the quantity returned out of the quantity invoiced.
4. Only the returned goods, at the invoice rate per unit, not the whole invoice again.
5. IGST at 18%, as on the invoice: the tax type follows the original sale.
6. Settlement and IMS: say whether you refund or adjust, and ask the buyer to accept it.

A full return

If all 40 chairs had come back, the credit note would credit all 40 lines, plus any freight or packing charged on the invoice if you refund it. Do not cancel or delete the invoice: once it is issued and reported, a full credit note is the only clean way to reverse it. If you refund the goods but keep the freight, credit the goods only.

Refund, store credit or replacement

The credit note settles what is owed; it does not move money. What happens next is a separate choice, and each choice has its own paperwork:

Restocking fees. If you keep part of the price (a 10% restocking fee, say), credit only the amount you are giving back. The part you keep stays as the value of the original sale, taxed as invoiced. Say so on the credit note: "Credited ₹X; restocking charge of ₹Y retained as per terms of sale."

E-commerce and marketplace returns

On a marketplace the seller is the supplier of the goods. So the seller issues the credit note, under its own GSTIN, against its own invoice, even though the customer clicked "return" on the marketplace and the marketplace arranged the pickup and the refund. Most marketplaces generate the credit note for you in the seller panel; it is still your document, in your series, and it goes in your GSTR-1.

• TCS is on net sales. The operator collects tax at source under section 52 on the net value of taxable supplies made through it, which means supplies minus returns in the same month. Since 10 July 2024 the rate is 0.5% in total (0.25% CGST + 0.25% SGST, or 0.5% IGST).
• Returns in a later month are deducted in the operator's GSTR-8 for the month the goods come back, so the TCS credited to you is adjusted then, not in the month of the sale.
• Reconcile monthly: your credit notes, the marketplace's return report and the TCS in your GST account should agree.

Here is a typical consumer return, by a buyer in Karnataka from a Bengaluru seller (intra-state, so CGST + SGST). Apparel priced up to ₹2,500 a piece is taxed at 5% from 22 September 2025.

Getting the goods back into stock

1. Receive and countRecord a goods received note for the return: date, quantity, condition, and the invoice it came from. This is your evidence the goods actually came back.
2. InspectSort the goods into resaleable, repairable and scrap. The credit note can be issued once the return is accepted; inspection decides what happens to the stock, not what the customer is owed.
3. Restock at costResaleable goods go back into inventory at the cost they left at, not at the selling price.
4. Write off the restGoods scrapped or written off leave stock as a loss. Under section 17(5)(h) of the CGST Act, input tax credit on goods written off or destroyed is not available, so reverse any credit taken on their inputs.

Journal entries on both sides

For the six chairs above. Patel's entry reverses the sale and the output IGST:

If Patel keeps perpetual inventory and the chairs cost ₹4,900 each to make, it also brings the six chairs back into stock: debit inventory ₹29,400, credit cost of goods sold ₹29,400. If it refunds instead of adjusting, it later debits Nimbus and credits the bank with ₹52,746.

The buyer's credit to input IGST is the reversal that lets the supplier's output tax fall. In TallyPrime these are a Credit Note voucher (seller) and a Debit Note voucher (buyer) against the original bill.

Returns after the GST time limit

A credit note reduces GST only if it is declared by 30 November following the end of the financial year of the original sale, or by the date the annual return for that year is filed, if earlier. For Patel's invoice of 12 September 2026, that is 30 November 2027 at the latest. For goods that come back later, two routes remain:

• Commercial credit note. Issue a credit note without GST: it reduces what the customer owes, but your output tax and the buyer's input credit stay as originally reported.
• The buyer sells the goods back. A registered buyer can treat the return as a fresh supply to you, issue its own tax invoice with GST, and you claim input tax credit on it in the normal way. This keeps the tax neutral without a section 34 credit note.

Returns from consumers and returned exports

Unregistered customers (B2C)

A consumer has no input tax credit to reverse, so the condition in section 34(2) works differently: your output tax may be reduced unless the tax has been passed on to someone else. For a refund to the consumer who paid it, that test is met. Report the credit note in GSTR-1 table 7, netted against the month's B2C sales, unless the original invoice was an inter-state B2C invoice above ₹1 lakh, in which case it goes in table 9B as an unregistered credit note (CDNUR). Shops often give a credit slip instead of cash: that slip is the credit note, and its unused balance is money you owe.

Returned exports

Goods exported and sent back by the overseas buyer come back through customs as a re-import. Customs Notification 45/2017-Customs allows re-import of exported goods, generally within three years, subject to conditions that usually include paying back export benefits taken on them, such as duty drawback or an IGST refund. On the GST side, issue a credit note against the export invoice for the goods returned; it is reported as a credit note to an unregistered (overseas) recipient. Tell your bank too, so the export entry it tracks for realisation of the proceeds can be closed against the re-import rather than left as unpaid.

United Kingdom and United States: returns in short

• UK, consumers buying online or by phone: they can cancel within 14 days of receiving the goods and then have 14 more days to send them back; you must refund within 14 days of getting the goods back. For faulty goods, the Consumer Rights Act 2015 gives a 30-day short-term right to reject for a full refund.
• UK VAT: a VAT credit note must be issued within 14 days of the refund and show the original invoice number and date and the VAT credited (VAT Notice 700, section 18). A shop that never issued a VAT invoice to a consumer simply records the refund and reduces its sales.
• US: the document is a credit memo. Most states let you deduct returned sales on your sales tax return when you refund the full price including the tax; California, for example, excludes returned goods when the full sale price including sales tax is refunded in cash or credit, and limits any restocking charge to the actual cost of handling the return (Regulation 1655).

Mistakes to avoid with returns

• Crediting the whole invoice for a partial return. Credit the returned quantity and re-invoice nothing.
• Relying on the buyer's debit note. It has no GST effect; the supplier's credit note is what reduces tax.
• No proof the goods came back. Keep the goods received note and quote it on the credit note.
• Letting the marketplace's return and your credit note drift apart. Reconcile each month with the TCS statement.
• Waiting past 30 November of the following year. After that, the credit note no longer reduces GST.

Key terms

Sales return (returns inward)

Goods sent back by a customer; the seller records it with a credit note.

Purchase return (returns outward)

Goods sent back to a supplier; the buyer records it, often with a debit note.

Goods received note (GRN)

The record that returned goods arrived, with date, quantity and condition.

Commercial credit note

A credit note issued without GST, reducing the amount owed but not the tax.

TCS (e-commerce)

Tax collected by a marketplace operator under section 52 on a seller's net sales through it.

Re-import

Bringing exported goods back into India, for example when an overseas buyer returns them.

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