Earlier this year, the Kenya Revenue Authority (KRA) introduced new tax regulations to monitor all business transactions in real time. These laws require businesses to provide complete transparency by submitting all invoices to KRA through the eTIMS portal and issuing KRA-signed invoices to customers.
However, compliance with these new regulations extends beyond submitting and signing invoices. This article seeks to clarify one key aspect of these regulations, credit notes, and what business owners need to know to remain compliant under the eTIMS system.
What are Credit Notes?
A credit note is an official document issued to confirm the return of funds, usually in cases of refunds or adjustments. For example, when goods are returned and a refund is processed, the proof of the refund is recorded through a credit note. These documents typically display negative amounts to indicate a reduction in business revenue.
Credit notes come in two forms:
1. Full Credit Notes
A full credit note is issued when the entire amount of the original invoice is refunded.
For instance: A customer purchases a box of painkillers from a pharmacy for Ksh 500. After the purchase, they discover the box is already open and missing some pills. The customer returns the entire box, and the cashier refunds the Ksh 500. A full credit note is generated to reflect that the box of painkillers was returned, and the full payment was refunded.
2. Partial Credit Notes
Partial credit notes are issued when only part of the original invoice is refunded. This may occur when only some items are returned or when a refund is issued due to overcharging.
For instance: A retailer purchases three boxes of surgical spirit, each priced at Ksh 3,000, resulting i
n a total cost of Ksh 9,000. If the retailer decides to return two of the boxes, the seller refunds Ksh 6,000 and issues a partial credit note to document the refund. Another common scenario involves overcharging. For example, if a customer is charged Ksh 2,500 for an item that costs Ksh 2,000, a partial credit note would be issued for the excess amount of Ksh 500.
A sample credit note template by Slade360 Advantage
When and Why to Issue Credit Notes
Kenya Revenue Authority (KRA) requires a valid reason for issuing a credit note, with common justifications including:
Missing quantity - Paying for a certain number of items but receiving fewer.
Damaged goods - Receiving items that are defective or broken.
Overcharges - A customer is charged more than the actual price.
Wrong information - Incorrect customer name, KRA PIN, item price, or tax type.
Raw material shortage - Items are out of stock after payment is made.
Others- If the reason doesn’t fall into any predefined category, businesses can specify an alternative valid reason.
Compliance Rules for Credit Notes
To ensure compliance with KRA regulations, businesses must follow these key rules.
Linking to the original invoice
Every credit note must reference the original invoice number, ensuring it can be traced back to the transaction.
Amount limitations
The total refund on a full credit note cannot exceed the amount on the original invoice.
Timeliness
Credit notes can only be issued within six months of the original invoice date. For example, if an invoice was issued in January, any credit note must be issued by June.
Partial credit note rules
Only one partial credit note can be issued per invoice. After that, any further credit note for the same invoice must be for the full remaining amount.
For instance, a customer purchases five syringes for Ksh 200 each, totaling Ksh 1000. If they return two syringes and receive a partial credit note for Ksh 400, any future returns for the remaining three syringes must result in a full refund of Ksh 600 no further partial credit notes can be issued.
Required Information for Credit Notes
Conclusion
Credit notes are a significant part of KRA's initiative to improve transparency and compliance in business transactions under the eTIMS system. These documents officially record complete or partial refunds and are vital for maintaining clear records and accountability in financial dealings. Businesses should ensure their billing systems generate credit notes according to KRA regulations. Compliance helps build customer trust and protects companies from penalties or complications during audits.
Slade360 Advantage is a reliable solution for ensuring this compliance. The platform simplifies credit note generation by seamlessly linking it to the original invoice. This streamlines the refund process and ensures that all necessary information is included, thereby confirming the document's validity.
Moreover, Slade360 Advantage allows businesses to process refunds quickly while adhering to the required timeframes. Overall, leveraging our solution enables businesses to navigate the complexities of credit note generation while staying compliant with KRA's evolving regulations.
Written by Caroline Mwangi, Software Engineer.
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