3.
You're absolutely right—this scenario often leads to a Net ITC (Input Tax Credit) mismatch, and it creates confusion during monthly reconciliations between GSTR-1, GSTR-2B, and GSTR-2B.
Let's break down the issue and offer some remedies.
✅ Your Current Process:
- You return material to the supplier and raise a Tax Invoice (Sales Return) from your end.
- You report it in GSTR-1 under outward supplies.
- The supplier issues a Credit Note for the same return.
- The Credit Note shows up in your GSTR-2B, reducing your eligible ITC.
- You now have both:
- An outward supply (your Tax Invoice return), and
- A reduction in ITC (from the supplier's Credit Note), causing double impact and reconciliation mismatch.
🔍 What’s Going Wrong?
The issue is that both parties are accounting for the same transaction, but differently:
- You treat it as an outward supply (sale).
- Supplier treats it as a purchase return (credit note).
This duplication distorts ITC, especially if the supplier's credit note is automatically reducing your eligible ITC in GSTR-2B.
✅ Recommended Remedies
Option 1: Avoid Issuing a Tax Invoice for Returns
- Instead of issuing a Tax Invoice, issue a Delivery Challan while returning goods to the supplier.
- Let the supplier issue the Credit Note under Section 34 of CGST Act.
- You acknowledge and accept this Credit Note in your books.
- This way, the transaction is captured only once in the supplier’s GSTR-1 and your GSTR-2B.
📌 Why this works: You avoid double reporting. The Credit Note is enough to reverse the ITC in your books without needing to show a corresponding outward supply.
Option 2: Use Debit Note/Credit Note Appropriately
If the nature of return requires a Tax Invoice (e.g., for rejected materials sold on high-seas basis, or value adjustments), then:
- Communicate clearly with the supplier to not issue a Credit Note, or
- Treat your invoice as a debit note to the supplier and ask them to acknowledge that in their books without issuing a separate credit note.
- Align your accounting entries to match the supplier’s credit/debit notes.
Option 3: Mutual Agreement and SOP
- Establish a Standard Operating Procedure (SOP) with your suppliers for how material returns should be handled.
- Decide who will document the return, and how (Tax Invoice vs Credit Note vs Delivery Challan).
- This avoids duplication and makes reconciliation seamless.
Option 4: Communication & Documentation
- Keep a record of which returns you’ve raised tax invoices for and communicate with the supplier to not issue a Credit Note in such cases.
- Alternatively, ask them to issue Credit Notes only when no Tax Invoice is raised by you.
✍️ Suggested Ideal Flow (Best Practice)
Action
|
Document Type
|
GSTR Impact
|
Return of goods
|
Delivery Challan
|
No GSTR-1 entry
|
Supplier’s response
|
Credit Note (GSTN)
|
Shows in your GSTR-2B
|
ITC Reversal
|
Manual in GSTR-2B
|
Matches 2B data
|
⚠️ Compliance Tip:
Make sure the supplier issues the credit note within the prescribed time limits, or else the ITC reversal might not reflect in the correct tax period.