Credit note and debit note cause some hardship to quickly understand – who owes whom? Credit note is issued when the issuer ‘OWES’ money to someone, that is, it is issued by the person who owes money. Debit note is issued when any money is ‘OWED’ to the issuer, that is, it is again issued by the person who is the receiver of money.
1. When a cash discount is allowed at the time of collecting payment from a customer in terms of an agreement entered into prior to the supply, then the supplier would issue a credit note to the customer to the extent of such cash discount, to declare that he ‘OWES’ money. Then, the original amount due MINUS the credit note is the revised value of supply that the customer pays the supplier. To this extent, the GST thereon would also stand reduced, subject to conditions which have been discussed in the subsequent paragraphs.
2. Now, if the supplier charges a penalty for delayed payment of consideration, the supplier would issue a debit note for the amount of penalty, to the customer to declare that money is ‘OWED’ to the supplier. Then, the original amount due PLUS the debit note is the revised value of supply, that the customer pays the supplier. To this extent the GST thereon would also stand increased.
The conditions applicable on an issue of credit note are listed below:
a. The supplier may issue one or more credit notes for supplies made in a financial year through one or more tax invoices which have been issued by him earlier;
b. The credit note cannot be issued at any time after either of the following 2 events (“due date for credit note”):
3. Annual return has been filed for the FY in which the original tax invoice was issued; or
4. 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);
5. The credit notes so issued must be declared in the returns for the month in which they are issued, by the supplier and also the recipient, and latest by the due date for credit note as specified above.
6. The recipient, on declaring the same, must claim a reduction in his input tax credit if the same had been availed against the original tax invoice;
7. A credit note cannot be issued if the incidence of tax and interest on such supply has been passed by him to any other person;
8. Every credit note must be linked to specific original tax invoice(s);
9. In case of a credit note issued for a discount, the discount must be provided in terms of an agreement entered into before or at the time of supply, as provided in Section 15(2) of the Act.
10. The GST Law provides an exhaustive list of situations under which the registered supplier is entitled to issue a credit note says, ‘I OWE’ and issues credit note:
1. Actual value of supply is lower than that stated in the original tax invoice;
2. Tax charged in the original tax invoice is higher than that applicable on the supply;
3. Goods supplied are returned by the recipient;
4. Goods or services supplied are deficient.
The credit note contains all the applicable particulars as specified in Rule 53(1A) of the CGST Rules, 2017.
The GST Law mandates that a registered supplier may issue one or more debit notes for supplies made in a financial year through one or more tax invoices which has been issued by him earlier under the following circumstances:
a. Actual value of supply is higher than that stated in the original tax invoice;
b. Tax charged in the original tax invoice is lower than that applicable on the supply;
c. The debit note needs to be linked to the original tax invoice(s);
(i) The debit note contains all the applicable particulars as specified in Rule 53(1A) of the CGST Rules, 2017;
(ii) A debit note issued under Section 74, 129 or 130 would not entitle the recipient to avail credit in respect thereof, and the supplier shall specify prominently, on such debit note the words “INPUT TAX CREDIT NOT ADMISSIBLE”; as provided in Rule 53(3).
(iii) It may also be noted that no time limit has been prescribed for issuing debit notes. CA Final Result. Meaning, a debit note may be raised and uploaded subsequently, with no restriction as to the time period for doing so.
(iv) Except in the circumstances specified, credit note or debit note is not permitted to be issued merely because a financial adjustment is required to be made in respect of the receivable or payable. Please note that any credit note / debit note\ not issued in terms of Section 34 would not be a valid document under the GST Law. For instance, if a credit note has been issued in respect of goods returned after the due date for credit note, a credit note may be issued by the supplier for reduction in the amount payable by the recipient. However, he cannot claim a reduction in tax liability. On the other hand, the recipient of tax may be imposed to reverse the input tax credit that had been availed thereon. This position of law is also clarified vide Circular 72/46/2018 dated 26.10.2018 wherein it is clarified for claiming the reduction in output tax liability in case of return of goods (whether the goods have been expired or otherwise), the credit note should have been issued within the time limit specified under Section 34(2). BOI Balance Enquiry. It is further clarified that any credit notes issued after expiry of time limit specified under Section 34(2), there is no requirement to declare such credit note on the common portal by the supplier as tax liability cannot be adjusted in such case.
(v) Please review the circumstance for issuing credit note. As per circular 72/46/2018 dated 26.10.2018, there is no time limit to issue credit note but only for effecting ‘tax adjustment’. Credit note where tax adjustment is not involved need not even be filed on the portal as per this circular. Further, on review of table 5E and 5J of GSTR 9C, it is evident that such credit notes will suffer tax without any relief to recipient by way of tax adjustment.
(vi) Credit note (and to lesser extent, debit note) under section 34 must be contrasted with financial credit note issued in trade. Above circular 72 along with circular 92/11/2019- GST dated 7 Mar 2019 make it clear that (a) financial credits notes are extant practices in trade and (b) if tax adjustment is NOT made, then such credit notes are NOT to be reported in GSTR 1. It is important to recognize that credit notes (and even debit notes) are issued to record a bilateral agreement where treatment of credit note in issuersuppliers’ books (and GST records) must be mirrored in the recipient-customers’ books (and GST records). It would be worrisome if issuer-supplier accounts the financial credit note as expenditure (in other words, an inward supply) but the recipient-customer accounts the same as reduction from cost of purchase. Experts caution against taking this issue lightly particularly when post-supply transactions are riddled with different interpretations of contractual understanding and applied to GST. RSCIT Online Test. Another circular 105/24/2019-GST dated 28 Jun 2019 laid down some interesting and fundamental Contract law principles but was withdrawn ab initio (by 37th GST Council decision) without stating whether those principles were not applicable to GST or the circular was erroneous due to certain reasons.
(vii) Credit note are also issued for accounting any unilateral treatment such as write-off of bad debts, etc., Therefore, care must be taken to identify (a) whether the CN-DN are to reflect a bilateral arrangement or unilateral arrangement (b) whether such CN-DN is harmoniously reflected in both parties books (and GST records) or not (c) whether such CN-DN are a reflection of pre-supply understanding with a contingency or a post-supply understanding reached subsequently (d) whether such CN-DN is a traditional document issued when in fact a tax invoice (from the other party) ought to be issued and (e) whether CN-DN is ‘earned’ by any activity by the recipient or is an ‘entitlement’ that is admitted subsequently. GST treatment will greatly vary based on the answers to these questions.