Debit Notes and Eligibility of Input Tax Credit of it in GST

Introduction

A debit note is a commercial document commonly used in business-to-business (B2B) transactions, which can be utilized by either buyers or sellers to address the amount owed for the sale of goods or services. Essentially, it serves as an additional note associated with an invoice, typically indicating the necessity to adjust the invoiced amount.

When does debit note is 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.

Example:

Let us suppose ARG Pvt Ltd supplied goods worth Rs. 20,000 units @ Rs. 20 per unit to M/s RBG Traders on April 1, 2024. The GST charged on such a supply is 5% which is Rs. 20,000. However, on selling the goods, ARG 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, ARG Pvt Ltd issued a debit note in favor of M/s RBG traders.

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

Relevant Legal Provisions of GST law

Section 34(3) and 34(4) of CGST Act, 2017 talks about the Debit notes. Following are the provisions stated in the section:

(3) Where one or more tax invoices have 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 one or more debit notes for supplies made in a financial year containing such particulars as may be prescribed.

 (4) Any registered person who issues a debit note in relation to a supply of goods or services or both shall declare the details of such debit note in the return for the month during which such debit note has been issued and the tax liability shall be adjusted in such manner as may be prescribed.

 Explanation. -For the purposes of this Act, the expression “debit note” shall include a supplementary invoice.

From the above provisions it can be stated that where the value of supply declared in the original invoice is lower as compared to the revised amount, a debit note is issued to give effect to the increase in prices. The debit notes which are issued should also be reported in the GST returns and the tax liability on it should be paid by the supplier.

Further, 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) of CGST Act,2017.

Contents of the Debit Notes

As per Rule 53(1A) of the CGST Rules, 2017 debit notes shall contain the following particulars, namely:

1. name, address and Goods and Services Tax Identification Number of the supplier;

2. nature of the document;

3. 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;

4. date of issue of the document;

5. name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient;

6. 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;

7. serial number(s)and date(s) of the corresponding tax invoice(s) or, as the case may be, bill(s) of supply;

8. 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; and

9. signature or digital signature of the supplier or his authorised representative.

Eligibility of Input Tax Credit

Section 16 deals with the eligibility of input tax credit in CGST Act,2017.

As per Section 16(2) of CGST Act, 2017 the basic conditions for entitlement of ITC are:

Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37.

(b) he has received the goods or services or both;

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or  through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39.

Therefore, a registered person is eligible for claiming the input tax credit of the debit notes issued by the supplier.

What is Time Limit for Eligibility?

To gain a comprehensive understanding of the time limit for the eligibility of input tax credit of debit notes, it is necessary to refer to the earlier provisions of Section 16(4), which are outlined below:

Provision before amendment made through the Finance Act, 2020

Section 16(4) of the CGST Act, 2017 provides that a registered person shall not be entitled to take ITC in respect of any invoice or debit note for the 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 or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

In other words, the section provides that ITC on the debit note can be claimed till earlier of the following events:

• the date of furnishing of annual return or
• the return for the month of September

for next financial year to which the corresponding invoice of such debit note is related.

Thus, the ITC of the debit note is linked with and dependent on the corresponding invoice.

Current Provision:

 Section 16(4) has been amended to provide that 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 thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

In other words, the amended section provides that ITC on the debit note can be claimed till earlier of the following events:

• the date of furnishing of annual return or
• the 30th November

for the next financial year to which the debit note is related.

The said amendment has been introduced to delink the invoice and debit note for the purpose of claiming ITC.

In light of the above provisions, it can be concluded that ITC shall be available on the debit notes which are issued in the following financial years of the corresponding invoice. Also, the corresponding invoice shall not be taken into consideration for the purpose of determining the last date of claiming ITC on debit notes.

Illustration:

This can be illustrated with the help of the following example:

On September 20, 2021, the Central Board of Indirect Taxes and Customs (CBIC) issued 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.

Hence, it is believed that this amendment has been introduced to facilitate the claiming of input tax credit. The decoupling of debit notes from their corresponding invoices is a positive development, as linking debit notes to the original invoice was deemed unfair and inequitable to the recipient of goods or services.

Moreover, it’s essential to ensure that the tax is not paid due to any demand under Section 74, 129, and 130 of the CGST Act, 2017. If tax payment is made under these sections, it will fall under the category of blocked credit as mentioned in Section 17(5)(i) of the CGST Act, 2017 and the ITC will not be eligible on such debit notes.

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Disclaimer: The article is based on the relevant provisions and as per the information existing at the time of the preparation. In no event I shall be liable for any direct and indirect result from this article. This is only a knowledge sharing initiative. The article is intended as a news update and affluence advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting because of any material contained in this article.