One of the Mantra’s to avoid litigation in GST is charging GST on the higher side (higher rate or valuation or not taking disputed exemptions etc.,) and pass it to the recipient. It becomes easier when the recipient can take the ITC. While the aforesaid Mantra works wonderfully when sufficient care was taken at the time of issuing the original invoice. However, there is an extended facility by way of ‘Debit notes’.
What is “Debit note” under GST:
Section 34(3) & (4) of the CGST Act, 2017 provides that if the taxable value or tax charged in the invoice is lesser than what it should be, a Debit Note could be issued for such differential tax. Unlike credit notes, there is no fixed time limit for issuing Debit notes. Section 16(2)(a) of CGST Act, 2017 read with Rule 36(1)(c) of CGST Rules, 2017 recognises the ‘Debit note’ as prescribed document to avail ITC.
However, if the Debit notes are issued belatedly beyond September of Next financial year, the aforesaid Mantra would not work since Section 16(4) of CGST Act, 2017 puts a time limit block.
To give an example, the taxpayers initially have not charged GST believing that product is exempted but at the time of books finalization or filing of Annual return (which most likely happens after the end of September of next financial year), it was told that GST is liable on the product at 18% and claiming the exemption is a huge risk to the Business. Thus, by that time the taxpayers realizes his mistake, the Mantra (passing GST to the recipient by way of ITC) to avoid the disputes would not be possible due to the time limit given under section 16(4), ibid for ITC availment i.e. September of Next financial year.
For those categories of taxpayers, Finance Act, 2020 has made a blissful amendment in Section 16(4), ibid vide Section 120 of Act, 2020 (made effective from 01.01.2021 through Notification No. 92/2020-C.T dated 22.12.2020). The comparative provisions are tabulated below:
| Section 16(4), ibid before the amendment | Section 16(4), ibid after the amendment |
| 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 financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier. | 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 financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier. |
The background of the making the aforesaid amendment can be traced from the agenda of the 38th GST council meeting (relevant extracts are given below):
Gist of Issue Proposal
| Gist of Issue | Proposal |
| 1. Section 34 (3) allows issuance of debit note 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”. Moreover, as per section 16(4), a registered person is not entitled to take credit of a debit note beyond “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”
2. 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 Engg. 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 along with interest, 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 to amend 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” |
On comparative reading of the amendment and the above extracts, the objective of the aforesaid amendment is to delink the Debit note from the original invoice date while calculating the time limit u/s. 16(4). In effect, the date of the Debit note would be considered for the time limit to claim ITC of GST paid through such debit notes and not the original invoice date. For example, the last date for the Debit notes raised in January 2021 for the original invoices raised in FY 2019-20, the last date u/s. 16(4), ibid would be counted linking with the Debit Note date instead of Original invoice date. The same is explained in the below table:
| Sl. No | ITC of GST paid through | Last date to avail ITC | |
| Before the amendment | After the amendment | ||
| 1 | Original invoice raised on 31.12.2019 | 20.10.2020 | 20.10.2020 |
| 2 | Debit note raised on 10.01.2021 pertains to the above original invoice dated 31.12.2019 | 20.10.2020 | 20.10.2021 |
Areas where this amendment helps:
In absence of the time limits to issue Debit notes, it is a very good opportunity to avail the benefit of the aforesaid amendment and avoid the possible disputes, some of them are illustrated below:
- Adoption of the lower rate resulting in short payment of GST. For example, the taxpayers would have charged 5% but the actual rate is 12%.
- Short payment of GST due to claiming of ineligible exemption or disputable exemptions. For example, the dealers/distributors have not paid GST on the various incentives/discounts received from the manufacturers but the department in the audit/investigation claims that it is liable for GST.
- Short payment of GST due to undervaluation of the taxable value. For example, GST was paid without adding the expenses reimbursed.
- The differential amount charged due to the finalisation of the Price variation clause at a later point of time. For example, it was agreed that price would be escalated in correspondence variation in fuel prices and many times, the price escalation takes a long time to finalise.
- Cross charge missed out in the past. For example, The Head office/corporate office would have not charged for the support services given to the various units in other states.
- Interstate/unit transfers missed charging GST. Charge GST on nominal value as another party anyway eligible for ITC & can avoid the non-compliance.
- Transactions between the Group companies/entities not offered for GST. For example, the Holding company has given a corporate guarantee for the loan taken by the subsidiary.
- Any other scenarios of not/short charging of GST by the supplier. For eg: Builder missed charging GST to the landowners towards the share allocated to him.
In all these cases, the supplier can charge GST by raising the Debit note now so that the recipient can avail the ITC.
For feedback/queries: [email protected]
Author Bio
Dear Sir
Your article has been Very well articulated and simply explained. Your aforesaid article says that DN can be raised in case of inter branch and cross charge transactions which have been missed in ealier years.
Had a query, if Original Invoice has not been raised, how can a DN be raised
Your expert advise shall be highly appreciable
Thanks Rajesh for reading & valuable feedback.
If no invoice is issued in the past for cross charge, they can give invoice itself now.
Dear Sir
To my little understanding, what i am interpreting is that relaxation which is available thru amendment in Section 16(4) is wrt Debit Notes issued at a later date may be aftr 2 to 3 years of raising Original Invoice and shall not be applicable for Original Invoice which itself is issued at a later date
Kindly clarify
Rajesh ji,
Issuing invoice is sufficient for raising Debit notes. Belated issue of invoice do not make difference in my view.
Sir,
In a case , where GST was not charged earlier and subsequently a debit note is raised , how do we declare the debit note in GSTR 1 . In my opinion , the taxable value of the debit note should be declared as nil and the tax amount should be manually filled up in the tax columns . Hope i am right . If we fill up the actual taxable value in GSTR 1 , the value of the debit note as per the return ,will not match with the actual value of the debit note , which is only for the tax amount .
Yes. It can be done i.e. Debit note can be disclosed only for tax component
most awaited amendment, this will definitely help out clients
Dear Readers,
Please read the date of 20.10.2020 in place of 20.10.19 in the above table (table no. 3)
Proof read before submitting.
If original invoice is date 31 Dec 2019 then last date to avail ITC cannot be 20 Oct 2019 it will be 20 Oct 2020. Wrong chart made.
Dear Sir,
Thanks for correction. Rectification was made now