On 20th September 2021, CBIC issued a Circular No. 160/15/2021-GST which in simple language reads as under:

The intent of law as specified in the Memorandum explaining the Finance Bill, 2020 states that “Clause 118 of the Bill seeks to amend sub-section (4) of section 16 of the Central Goods and Services Tax Act so as to delink the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing input tax credit.

Accordingly, it is clarified that:

a) w.e.f. 01.01.2021, in case of debit notes, the date of issuance of debit note (not the date of underlying invoice) shall determine the relevant financial year for the purpose of section 16(4) of the CGST Act.

b) The availment of ITC on debit notes in respect of amended provision shall be applicable from 01.01.2021. Accordingly, for availment of ITC on or after 01.01.2021, in respect of debit notes issued either prior to or after 01.01.2021, the eligibility for availment of ITC will be governed by the amended provision of section 16(4), whereas any ITC availed prior to 01.01.2021, in respect of debit notes, shall be governed under the provisions of section 16(4), as it existed before the said amendment on 01.01.2021.

Now let us recall what was the old phrasing of Section 16(4) :

(4)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 the financial year to which such invoice relating to such debit note pertains or furnishing of the relevant annual return whichever is earlier”

This earlier provision led to the linkage of the original invoice with the debit note. Now let us first understand the meaning of the debit note.

What is a Debit note? Explained with example

Typically, a debit note is raised for accounting purposes. However, such a debit note has no relevance under GST. For the purpose of GST, both debit and credit note need to be issued by the supplier of goods or services. In case the supplier fails to show the details of such documents in the valid returns, the recipient needs to declare the same in his valid returns. Furthermore, the supplier needs to accept such documents in order to bring about changes in his valid returns.

When is debit note issued?

When a registered person supplies goods or services, he needs to necessarily issue a tax invoice. Upon issuing the tax invoice, however, a registered supplier is required to issue a debit note to the recipient in the event of any of the following cases:

  • the supplier charges value of goods or services in the invoice that is less than the actual value of such goods or services
  • supplier charges a lower rate of tax than what is applicable on goods or services supplied
  • the quantity of goods or services received by the recipient is more than what has been declared in the original tax invoice
  • any other reasons

Let us suppose Kanye Pvt Ltd supplied goods worth Rs. 20,000 units @ Rs. 20 per unit to M/s Drake Traders on April 1, 2017. The GST charged on such a supply is 5% which is Rs. 20,000. However, on selling the goods, Kanye Pvt Ltd realizes that the price charged for each unit was Rs 22 and not Rs. 20. As is evident, the amount charged in the tax invoice was less than the amount of goods delivered. Thus, Kapoor Pvt Ltd issued a debit note in favor of M/s Drake Ltd.

Such a debit note would notify M/s Drake traders that a debit needs to be made in their own account. In other words, debit note is an intimation to M/s Drake Traders that it still owes Kanye Pvt Ltd an amount equal to Rs. 40,000 (Rs. 2 x 20,000) and GST of Rs. 2000 under original invoice.

Now explaining this in conjunction with the current circular if an invoice is issued in F.Y 2019-20 and a debit note is issued in F.Y 2020-21, then debit note will not be linked to the original invoice date and ITC will be allowed to be claimed in F.Y 2020-21 Annual return filing date i.e 30th September 2021.

Analysis: In case of a debit note there is no express time limits prescribed under the GST Law till when a corresponding debit note against corresponding invoice should be issued; unlike the time limit for issuance of credit notes which is barred by time limitation under Section 34(2).

This is due to the fact that issuance of debit note increases the tax liability which adds to the Govt. Exchequer’s kitty.

A few more examples have been taken for a better understanding of the circular:

Invoice issued Debit note issued Credit can be claimed in which year
2020-21 2021-22 2022 i.e latest by September 2022
Original invoice dated 24.03.2021 07.08.2021 Since debit note issued in 2021-22, credit for the purposes of Section 16(4) can be taken in 2021-22
Original invoice dated 16.07.2019 11.11.2020 As per amended provision of section 16(4), the relevant financial year for availment of input tax credit on the said debit note, on or after 01.01.2021, will be FY 2020-21 and accordingly, the registered person can avail ITC on the same till due date of furnishing of FORM GSTR-3B for the month of September, 2021 or furnishing of the annual return for FY 2020-21, whichever is earlier.

Circular can be accessed at https://taxguru.in/goods-and-service-tax/cbic-clarifies-issuance-debit-note-physical-copy-invoice-refund-unutilized-itc.html

Author’s Comments: Delinking debit notes with corresponding invoices is a welcomed change as linking the debit notes with the original invoice was unfair and unjust to the recipient of goods or services and this has finally caught the attention of the lawmakers .

Author Bio

Qualification: CA in Practice
Company: Naveen Jain & Co.
Location: New Delhi, Delhi, India
Member Since: 14 Dec 2019 | Total Posts: 10
The author is a DISA Qualified Chartered Accountant who specializes in the field of GST, Income Tax ,MSME and ROC Compliances. View Full Profile

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