Background:

In terms of the provisions relating to issue of debit notes in s 34(3) of the CGST Act, it shall be issued by the registered person who has supplied such goods or services or both where the taxable value and/or tax charged in the invoice is found to be lesser than the actual value/tax on the supply i.e., to say where the supplier has charged excess or wrong taxable/tax in such a case he could issue debit note with GST. The expression “debit note” would include a supplementary invoice.

Debit Note as the Source document

Who can issue a GST Debit note? From the above provision, one could conclude that GST debit note can be issued only by a registered supplier of goods or services or both. The recipient is not entitled to issue a GST debit note.

Whether raising GST debit note is compulsory in GST? The wordings employed in Section 34(1) are ‘the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note’. A question may arise as to whether a debit note has to be compulsorily raised with GST. It is pertinent to note that section 34 contains the word ‘shall’, which means that debit note is a direction given to the supplier, which he could issue as a compulsion. It was held in the case of A.K Spintex Ltd versus Commissioner of Central Excise, Jaipur-II [2015 (326) E.L.T 704 (Tri – Delhi)] that Duty on debit note needs to be paid to the department as it is liable for inclusion in the assessable value even though the same has not been received from the recipient of debit note and hence the assesse is liable to pay duty on the debit note amount.

Details given above are only in relation to GST debit note. One may refer to Circular 92/11/2019 GST dt. 07th March 2019 for details in relation to financial debit note.

Input tax credit in relation to GST debit note:

It is a very common practice in business to revise the prices charged for supply with a retrospective effect. Now, the question of law here is whether the input tax credit (‘ITC’) would be available on the tax component related to such debit notes. If yes, what will be the maximum time limit up to which such ITC can be availed by the recipient.

Position before Amendment:

In terms of Section 16(4) the registered person would not be entitled to take ITC in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing 3B for the month of September following the end of financial to which such invoice or invoice relating to such debit note pertains or furnishing of relevant annual return, whichever is earlier.

There was an anomaly in the law, that the due date for availment of ITC was the due date of September return of subsequent financial year to which the invoice related, for example if invoice is issued in January 2020 (i.e. FY 2019-20) and debit note against such invoice is issued in October 2020, then the time limit to avail ITC w.r.t such debit note would be 20th October 2020 [last date to avail ITC] i.e. before the date of issuance of debit note itself and recipient would never be eligible to avail ITC of such debit note due to such proposition in law.

To correct this anomaly in GST law, the Law Committee in the 38th GST Council Meeting discussed the gist of the issue, that on the plain reading of the provisions suggests that, in case debit note relating to an invoice is issued beyond September of the next financial year, the same is barred from claiming ITC by the recipient. This is leading to a problem for sectors such as Automobiles, Heavy Engineering. PSUs etc. where a price revision is inbuilt in the contract, and as per the provisions, in case of escalation on this account, a debit note can be issued and corresponding tax shall be collected and deposited to the Government, but corresponding credit to the recipient is barred.

The Law Committee examined the matter and felt that credit may be allowed for debit notes irrespective of the date of issuance of the underlying invoice as anyway interest is being paid when tax liability is discharged in case of debit note. Accordingly, the Law Committee recommended amending the provisions of section 16(4) to allow ITC on debit notes by linking it to the date of issuance of the debit note by omitting the words “invoice relating to such”. Consequently, the said amendment was proposed in clause 120 of Finance Act, 2020.

Position after Amendment:

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 debit note pertains or furnishing of the relevant annual return, whichever is earlier. 

It is important to note that the amendment proposed by the Finance Act, 2020 was notified and made effective from 01.01.2021 vide NN. 92/2020-CT dt. 22.012.2020

Example: If an invoice was issued, say during Feb’19 and a debit note pertaining to such invoice is issued during Sep’19 then, prior to this amendment, the last date for taking credit in respect of this debit note would have been the due date of filing Form GSTR-3B for the month of September 2019. However, post this amendment, the last date for taking such credit would be the due date of Form GSTR-3B for the month of September 2020 as the debit note was issued in the FY 2019-20.

However, The Hon’ble Gujarat Authority for Advance Ruling in the case of M/s I-TECH PLAST INDIA PVT. LTD. GUJ/GAAR/R/10/2021 has denied the claim of ITC on debit notes issued in FY 2020-21 which pertained to the transaction of FY 2018-19, due to the following reasons:

a. Irrespective of the fact that wordings ‘invoice relating to such’ is connected to ‘debit note’, the fact remains that a debit note is always connected to the invoice. The omission of the ‘invoice relating to such’ does not mean that the relation of the debit note with the invoice has been cut off.

b. The intention of the government was not to disconnect the debit note from the original invoice so that the debit note gains an independent existence so as to entitle the applicant to claim Input Tax Credit in relation to CGST-SGST charged separately in debit notes issued by the supplier in following financial years.

c. The amendment does not imply that the year in which the debit note was issued will be considered as the ‘financial year’ for the purpose of amended Section 16(4). If a debit note is issued in a different financial year than that of the financial year in which the original invoice was issued, the financial year to which the debit note pertains will always be considered to be the year in which the original invoice was issued.

d. It was held that the financial year to which a debit note pertains, is invariably the financial year in which the original invoice (related to the said debit note) was issued.

It is important to note that Advance ruling which is issued in the above case is applicable only to the assesse who has applied for and got the ruling. In the authors view, it has limited persuasive value for other assesses. It needs to be considered if it is in line with the GST law. While this being a ruling of the AAR and this matter may be canvassed before the appellate forums in future. However, the present AAR seems to be incorrect as it has completely overlooked the intent of the amendment and is therefore wrong in the eyes of the law and may not sustain the test of time in law. Similarly, it was held in the case of Grasim Industries Ltd v/s Commissioner of central excise, Indore [2011 (24) S.T.R 691 (Tri – Delhi)] and Ad-Manum Packing Pvt Ltd versus Commissioner of C. Ex. Indore [2017(346) E.L.T 142(Tri – Delhi] that debit notes issued by the service provider can be treated as invoice and Cenvat credit availed on the basis of debit notes is admissible as per Rule 9 of Cenvat Credit Rules, 2004. However, under GST regime, Rule 36 recognizes debit note as one of the documents to avail the credit.

Whether the above amendment is retrospective i.e., from 1stJuly 20217 or prospective i.e. from 01stJanuary 2021?

If a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. Similarly held in the case of Government of India v. Indian Tobacco Association 2005 (187) E.L.T. 162 (S.C.) – Para 27 & 28.

A retrospective meaning to a provision should only be made to correct some law to the benefit of the tax payer.

Similarly, it held by Supreme court in the case of Commissioner of Income Tax (Central) New Delhi versus Vatika township private Limited 2014 (9) TMI 576.

Where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statue may be held to be retrospective in nature. Similarly, it held by Supreme Court in the case of Vijay Versus State of Maharashtra & ORS. 2006 (7) TMI 648.

On combined reading of the above, it is very much clear that the said amendment would merely a declaratory of the previous law and is also beneficial to the community as a whole. The intention of the law makers is also very much clear which was discussed in 38th GST Council meeting. In the view of the author, such amendment should be treated as curative amendment and hence, should have application retrospectively w.e.f. 1st July 2017.

Whether there is any need to pay interest for the additional tax liability raised due to debit note raised?

It is important to note that when a tax invoice is issued and later a debit note is issued, supply made earlier becomes a part supply and the amount paid as per debit note is for the supply of portion covered by the debit note and vice versa.

The Supreme Court interpreted the provisions of Section 11AB of the Excise Act in SKF India Ltd. – 2009 (239) E.L.T. 385 (S.C.) and International Auto Limited – 2010 (250) E.L.T. 3 (S.C.). In the above case, the Apex Court sustained the demand of interest on differential duty payment by the assesse. However, after taking note of the aforesaid judgments, recently in the case of Steel Authority of India – 2015 (326) ELT 450 (SC), this issue has been referred to the Larger Bench of the Supreme Court.

The Supreme Court recently in the case of Steel Authority of India – 2015 (326) ELT 450 (SC), held that it would be impossible to expect the assesse to pay the excise duty, at the time of clearance of the goods, on the basis of price escalation that took place at a later date in future. Therefore, as on the date of clearance when excise duty was paid, it could not be treated as ‘short-paid’ on the said date. As a consequence, when the principal amount, namely, the excise duty itself was not payable (i.e., on the differential) on the date of clearance of the goods, there cannot be any question of payment of interest.

The above ruling issued by Apex court under erstwhile Central Excise Law would be having the persuasive value under GST as well.j

However, the above decision was overruled by 2019 SC LB 2019 (366) E.L.T. 769 (S.C.) holding that interest needs to be paid on the supplementary invoice.

It is important to note that, unlike under Central Excise, GST law makes specific provision for issuance of debit note and do not take back the original invoice date as the Time of supply. As it clear from explanation to Section 12 and 13 which provides for time of supply which specifically provides supply is deemed to be made to the extent covered by invoice issued.

Similarly, Section 34 also provides that “the tax liability shall be adjusted in such manner as may be prescribed” via rules but no rule was made to prepone the liability to the date of the original invoice.Further,the said rule should not be taken as a license to undercharge and postpone the liability. The conjoint reading of GST law & rationale of LB in SAI also that if variation found later point of time, then only interest is not liable & not for every case.  Hence, liability arises at the time of raising debit note date only.The theme of Sec 142(2)(a) of CGST Act, 2017 fortifies the above view and also the clarification given vide Circular No. 76/50/2018-GST, dated 31-12-2018.

The Law committee in the 38th GST Council Meetingwhile discussing the above amendment discussed that credit may be allowed for debit notes irrespective of the date of issuance of the underlying invoice as anyway interest is being paid when tax liability is discharged in case of debit note. There was completely a wrong notion made in the GST council that interest is liable in case of Debit note which was clearly discussed above. Hence, the issue is amenable to disputes. In absence of interest on interest, stand can be taken that interest is not liable in case of Debit notes.

 However, where an assesse is having enough eligible credits lying in its electronic credit ledger, then the question of interest on debit note does not come into picture as amendment to section 50 has been made applicable retrospective from 1st July 2017 where in interest is applicable only on net cash liability.

Conclusion:

Based on the above discussion, authors view is that the said amendment would be made applicable retrospectively i.e., from the effect of GST law w.e.f. 1st July 2017. Further coming to the part of interest applicability on Debit note, one could dispute on the basis of above discussion supra and take a stand not pay interest on liability declared through debit note.

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Disclaimer: – The views expressed in this article are personal views of the Author. This article includes general information about legal issues and developments in the law of GST in India. Such materials are for information purpose only and may not reflect the most current legal developments. These information materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. We disclaim all liability in respect to actions taken or not taken based on any or all contents of this article to the fullest extent permitted by law.

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Qualification: CA in Job / Business
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Location: Bengaluru, Karnataka, India
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