GST - Debit and Credit Notes

GST Registration Services

Background

1. Credit Notes & Debit Notes have been used in accounting since a very long time. Their use is considered as established business practice by any industry, whereas Credit and Debit Notes in GST have a specified meaning attached to them. The same should be used in specific scenarios and by specific persons as per the provisions of the CGST Act. In this article we will be analyzing the meaning of these two terms as per GST Law, difference between Accounting or Financial Credit Debit Notes and GST Credit Debit Notes, Various Legal provisions of GST Law Regarding Credit/Debit Notes.

2. Credit/Debit Notes – Meaning and Conditions for Issuing these Documents :

2.1 Credit Notes - As per provisions of Section 2(37), "credit note" means a document issued by a registered person under sub-section (1) of section 34

As per the provisions of Section 34(1), where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed

Considering the Above Provisions We may Interpret that

(1)GST will only recognize the credit notes issued by Supplier of Goods or Services or both. Which means, though the practice of issuance of credit notes by recipient of supply will continue for all commercial purposes, yet the same has no relevance in GST parlance or GST compliance requirements, e.g., filing of Returns. Only the supplier will disclose the Credit Notes issued by him/her in the returns filed periodically.

(2)Credit Notes in GST shall only be issued for specific reasons mentioned in the Section 34 and not in all cases when it can be issued, e.g., to rectify the mistakes done in invoicing or accounting. So only the credit notes issued by the supplier for the following purposes shall be recognized in GST:

(a)The taxable value shown in the invoice exceeds the taxable value of the supply Example: Taxable value shown in Invoice as 105 plus taxes instead of 100 plus taxes. So credit note is to be issued for 5 plus taxes.

(b)The tax charged in the invoice exceeds the tax payable on the supply. Example: Tax payable in Invoice of 100 @ 18% instead of @12%. So credit note should be issued for tax of Rs. 6.. (Please note that there are still some technical issues to show the said credit note in GSTR-1)
(c)The goods supplied are returned by the recipient. Example is any standard goods rejection transaction.

(d)The goods/services are found to be deficient. Example is Invoice issued for 100 quantities and supplied 98 quantities. Proportionate reduction should be by way of Credit Notes.
(3)There may be other credit notes as discussed earlier which are commercial/accounting credit notes which as per prevailing practice in the industry are used but not recognized by the GST, the examples of which are as follows:

(a)Credit Note issued by the recipient in the name of the supplier to record the accounting of Debit Note issued by Supplier.

(b)Credit Note issued by the supplier for any other reason than above
To sum up the above understanding we will consider the following representative example of Goods Returned:

Goods Supplied and dispatched on 01.01.2018 Rs. 1,00,000 (100 Lots) [1,00,000+ GST @18% Rs. 18,000 = Total Rs. 1,18,000]. On account of defects identified during quality checks 2 lots returned to supplier on 03.01.2018 and 98 accepted (Rs. 98,000)

For the rejected material, the supplier will issue a credit note of Rs. 2,000 (2 Lots) [2,000+GST@18% Rs. 360 = Total Rs. 2360]

The Supplier will disclose the details of Outward Supplies-B2B Rs. 1,00,000 plus taxes, and further Credit Notes-B2B Rs. 2,000 plus taxes in the GSTR-1 of the Month of January 2018.

Due to the said disclosure in the return by the supplier alone, the recipient will have reflected in his/her GSTR 2A all details having a net impact of Rs. 98,000+ taxes (ITC) on it. The recipient need not show any details for the Credit Notes issued by his/her supplier. The recipient may record an accounting debit note for the purpose of recording the transactions in books of account (to give debit to the supplier for the rejected quantity the recipient might record debit note and reduce the amount payable to supplier due to rejected lots), but the same need not be disclosed in any returns except the impact of this in Form 3B. The same should also not be confused with the debit notes issued by him/her in capacity of supplier to his customers, as the same would require the disclosure in the returns.

In some of the cases, where it's technically not possible for the customer to collect the credit notes from respective suppliers, the customers themselves issue a tax invoice to supplier to reduce the impact of Sales by the supplier to him/her. In such scenarios credit notes are not issued by the Supplier. This practice, according to some of the experts, is correct as the net impact of taxes through the returns filed is same as issuing a credit note and reducing the sales. According to another school of thought this is wrong commercial practice due to reasons such as:

1. When material is returned, it's just the returning of the original material sent and not a supply by itself. Similarly, in case of charging of higher amount for supply or for tax is reduced by way of credit note in not a supply in itself.
2. So issuing a tax invoice without actual supply may not be tenable by the tax authorities and chances are there that it may also be treated as an offence under the provisions of Section 122, issuing tax invoice without actually supplying goods or services or both 2.2 Debit Notes - As per the provisions of Section 2(38) of the CGST Act "debit note" means a document issued by a registered person under sub-section (3) of section 34.

As per the provisions of Section 34(3) of the CGST Act, "Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed"

Considering the above provisions we may interpret that :

(A) GST will only recognise the debit notes issued by Supplier of Goods or Services or both, which means, though the practice of issuance of debit notes by recipient of supply will continue for all commercial purposes, the same has no relevance in GST parlance or GST compliance requirements, e.g., filing of Returns. Only the supplier will disclose the Debit Notes issued by him/her in the returns filed periodically.

(B) Debit Notes in GST shall only be issued for specific reasons mentioned in the Section 34 and not in all cases when it can be issued, e.g., to rectify the mistakes done in invoicing or accounting. So only the debit notes issued by the supplier for the following purposes shall be recognised in GST:

(a) The taxable value shown in the invoice is lesser than the taxable value of the supply. To illustrate, Taxable value shown in Invoice as 95 plus taxes instead of 100 plus taxes. So debit note to has to be issued for 5 plus taxes.

(c) The tax charged in the invoice is less than the tax payable on the supply. Example: Tax payable in Invoice of 100 @ 12% instead of @18%. So debit note should be issued for tax of Rs. 6. (Please note that there are still some technical issues to show the said credit note in GSTR-1)

(C) There may be other debit notes as we discussed earlier which are commercial/accounting debit notes which as per prevailing practice in the industry are used but not recognized by the GST, the example of which are as follows:

(a) Debit Note issued by the recipient in the name of the supplier to record the accounting of Credit Note issued by Supplier.

(b)Debit Note issued by the supplier for any other reason than above
To sum up the above understanding we will consider the following representative example of Supplementary Invoicing:

Goods Supplied and dispatched on 01.01.2018 Rs. 1,00,000 (100 Lots)[1,00,000+ GST @18% Rs. 18,000 = Total 1,18,000]. On account of unit rate finalization the basic price comes to Rs. 1,02,000 on 03.01.2018 and the same is accepted by recipient.

For the additional value of Rs. 2,000, the supplier will issue a debit note Rs. 2,000 [2,000+GST@18% Rs. 360 = Total Rs. 2360]

The Supplier will disclose the details of Outward Supplies-B2B Rs. 1,00,000 plus taxes, and further Debit Notes-B2B Rs. 2,000 plus taxes in the GSTR-1 of the Month January 2018.

Due to the said disclosure in the return by the supplier alone, the recipient will have reflected in his/her GSTR 2A all details having a net impact of Rs. 1,02,000+ taxes (ITC) on it. The recipient need not show any details for the Debit Notes issued by his/her supplier in GSTR 1. The recipient may record an accounting credit note for the purpose of recording the transaction in books of account (to give credit to the supplier for additional consideration, the recipient might record credit note and increase the amount payable to supplier), but the same need not be disclosed in any returns except the impact of this in Form 3B. The same should also not be confused with the credit notes issued by him/her in capacity of supplier to his customers as the same would require the disclosure in the returns.

Contents of Credit-Debit Notes:

3. As per Rule 53, read with Section 34 of the CGST Act, following should be the contents of Credit – Debit Notes:

(A) Name, address and Goods and Services Tax Identification Number of the supplier

(B) Signature or digital signature of the supplier or his authorised representative nature of the document.

(C) A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolised as "-" and "/", respectively, and any combination thereof, unique for a financial year

(D) Date of issue of the document

(E) Name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient

(F) Name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is un-registered

(G) Serial number and date of the corresponding tax invoice or, as the case may be, bill of supply value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient

Credit-Debit Notes Timelines to Issue These Documents and Its Implications:

4. The credit note cannot be issued any time after either of the following 2 events:

(1) Annual return has been filed for the FY in which the original tax invoice was issued, or

(2) September of the FY immediately succeeding the FY in which the original tax invoice was issued (i.e., for a tax invoice issued in April 2018, as well as a tax invoice issued in March 2019, the relevant credit notes cannot be issued after September 2019)

Therefore, in case of price negotiations, etc., which is predominant feature of various industries, let's say metal based industry, one should keep in mind that any benefit of rate reduction of the earlier year has to be passed on to the recipient on or before September 30thof following year by issuing appropriate credit notes or filing of annual return for the earlier year, whichever is earlier.

Further, there is no such condition in case of issuance of debit notes. Hence, a debit note related to say FY 2018-19 may also be issued by the supplier after September 30, 2019. But there is one provision which restricts the benefit of input tax credit of Debit Notes issued after September 30 of following year which are related to the invoices issued in earlier year.

As per provisions of Section 16 (4) of the CGST Act, "A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier"

As per the views of some of the experts, 'Rights that are not yet vested can lapse by limitation unless effective steps to actualize those rights are taken by the person, but once the right stands vested, it becomes indefeasible except by operation of subsequent inherent conditions'. In other words, input tax credit which is a right, in law, of the taxable person and also a prime factor in designing the concept of GST Laws in India, is not fully mature and is not available to the taxable person until all pre-conditions, i.e., steps mentioned in Section 16(2) are followed. If the same are fulfilled, then the right becomes a right that can be 'availed'.

Once the credit is availed, it is available without any time limit except a condition that if the outward supplies become exempted, the credit availed needs to be reversed. Other than the said situation, the credit availed is available in entirety to the taxable person.

Now, in a situation where the credit that is 'available' is due to any reasons 'not availed' or missed, it may still be available but not beyond the limitation prescribed in Section 16(4). Therefore, in case of doubts one may avail of the credit and then reverse it under protest with specific intimation to the department. This is to ensure that the time limitation would not be the reason for non-availment till the time the principle is settled through court decisions.

5. Other miscellaneous points regarding credit & debit notes :

1. The credit note issued as per the provisions discussed above must be declared in the returns for the month in which they are issued, by the supplier and also the impact of the same on tax payment by the recipient,
2. The same disclosure should be latest by the due date for credit note as specified above
3. The recipient, to show the impact, should reduce the input tax credit if the same had been availed against the original tax invoice
4. Every credit note must be linked to specific original tax invoice
5. In case of a credit note issued for a discount, the discount should be as per the provisions of Section 15(2) of the Act
6. The debit note needs to be linked to the original tax invoice
7.  A debit note issued under Sections 74, 129 or 130 would not entitle the recipient to avail of credit in respect thereof, and the supplier shall specify prominently on such debit note the words "INPUT TAX CREDIT NOT ADMISSIBLE
8. As per the current provisions of law, a consolidated credit-debit note cannot be issued for multiple invoices. Additionally, the date and serial number of the original tax invoice is mandatory to be disclosed. The proposed amended law may exclude this requirement.
9. Credit -Debit notes have to be raised with reference to specific invoice and not otherwise to get the benefit of tax adjustment
10. Conclusion

6. One has to unlearn the practices under the earlier tax laws in order to clearly understand the concepts of credit note and debit note under the GST Law. A credit note or a debit note, for the purpose of the GST Law, can be issued by the registered person who has issued a tax invoice, i.e., the supplier, only under specific scenarios before the time-limits discussed above. Any such document, by whatever name called, when issued by the recipient to the registered supplier, is not a document recognized under the GST Law.