Accounting for E-commerce Returns and RTO: Credit Notes, GST and Stock
How online sellers account for returns and RTO: credit notes and the GST time limit, TCS, marketplace fees, damaged stock and claims, with an example.
Returns are where most online sellers' books stop agreeing with the marketplace settlement and the GST portal. A customer return (the order was delivered and then sent back) reverses a sale you have already invoiced. A return to origin, or RTO (the order never reached the customer), may or may not reverse a sale, depending on whether an invoice was issued. Either way, the accounting has four parts: the sale and its GST, the stock, the marketplace's fees and the TCS it collected.
Customer return vs RTO
| Customer return | RTO (return to origin) | |
|---|---|---|
| What happened | Delivered, then returned by the buyer | Not delivered: refused, unreachable, cancelled in transit |
| Invoice | Issued and reported | Usually issued at dispatch; check your marketplace settings |
| GST | Reduce output tax through a credit note | If an invoice was issued and reported, a credit note; if not, no sale to reverse |
| Stock | Back in stock if resaleable; otherwise damaged or written off | Back in stock, after inspection |
| Marketplace charges | Return or reverse-logistics fee, with GST | RTO or forward-and-reverse shipping fee, with GST |
GST: credit notes and the time limit
When goods sold under a tax invoice come back, the supplier issues a credit note under Section 34 of the CGST Act and reports it in GSTR-1, which reduces the output tax. The credit note must be declared by 30 November following the end of the financial year in which the supply was made, or the date of filing the annual return if earlier. A return processed after that cannot reduce the tax.
- Issue one credit note per return or a consolidated one per period, as your marketplace or software supports, linked to the original invoices.
- Watch the buyer's side. Where the buyer is GST-registered, credit notes now flow through the Invoice Management System; see IMS and ITC.
- TCS follows the net figure. The marketplace collects TCS under Section 52 on the net value of taxable supplies, after returns, and reports it in GSTR-8. Your GSTR-1 net of credit notes should match; see marketplace GST reconciliation.
Stock: returned, damaged and lost
- Resaleable return: debit inventory at cost and credit cost of goods sold. Do not record it at selling price.
- Damaged but repairable: move it to a separate 'returned – under inspection' location so it is not counted as sellable stock.
- Destroyed or written off: write it off as an expense. Input tax credit on goods destroyed or written off is blocked, so reverse any credit taken on them.
- Lost or damaged by the marketplace or courier: record the claim as receivable when it is accepted, and the stock loss separately. Take advice on the GST position of the compensation for your case.
Marketplace fees on returns
Return, reverse-logistics and RTO fees are expenses of the business, charged with GST. Book them gross, with the GST as input tax credit, from the marketplace's tax invoice, rather than taking the net settlement figure. A seller who books only the net payout loses both the expense detail and the credit.
Worked example
A seller in Pune sells a Bluetooth speaker on a marketplace for ₹1,180 including 18% GST (₹1,000 plus ₹180) to a buyer in Delhi. The cost of the speaker is ₹500. The buyer returns it; the marketplace charges a return fee of ₹59 including ₹9 GST.
| Entry | Debit | Credit |
|---|---|---|
| Sale reversed: sales returns | ₹1,000 | |
| IGST output tax reversed | ₹180 | |
| Marketplace receivable reduced | ₹1,180 | |
| Stock returned at cost | ₹500 (inventory) | ₹500 (cost of goods sold) |
| Return fee expense | ₹50 | |
| Input tax credit on the fee | ₹9 | |
| Marketplace receivable reduced for the fee | ₹59 |
Illustrative figures, with GST rates assumed for the example; the rate on your goods depends on the item and its value.
A monthly returns checklist
- Download the returns and RTO report alongside the settlement report; see reading a marketplace settlement.
- Match every return to its original order and invoice.
- Issue and report credit notes in the same month.
- Inspect returned stock and post it to sellable, under-inspection or damaged.
- Book fees gross from the marketplace tax invoices.
- Reconcile GSTR-1 net sales with the TCS in GSTR-8 and your books.
- Follow up open claims for lost or damaged items.
Frequently asked questions
Q: Do I need to issue a credit note for an e-commerce return?
A: Yes, where the original sale was invoiced and reported. The credit note under Section 34 reduces your output GST and must be declared by 30 November after the end of the financial year of the sale, or the annual return date if earlier.
Q: How is RTO treated in GST?
A: If an invoice was issued and reported when the order was dispatched, reverse it with a credit note. If no invoice was issued, there is no sale to reverse; the goods simply return to stock.
Q: Does the marketplace TCS change when goods are returned?
A: Yes. TCS is collected on the net value of taxable supplies, after returns, so the TCS figure falls with returns made in the period.
Q: Can I claim ITC on marketplace return fees?
A: Generally yes, from the marketplace's tax invoice, subject to the usual conditions. Book the fee and the GST separately rather than the net payout.
Q: What happens to ITC on damaged returned goods that are written off?
A: Input tax credit on goods destroyed or written off is blocked, so any credit taken on them must be reversed.
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