A Guide to Debit Notes under GST
Debit notes, also known as debit memos, are commonly used in business-to-business (B2B) transactions. It assists the buyer in keeping track of his debt obligations to the supplier for goods or services received. It also helps suppliers in correcting undervalued invoices.
BOOK A FREE DEMO
What is a debit note?
A debit note is a type of commercial document that typically specifies any necessary adjustments to the amount of an invoice. Supplementary invoices are another term for debit notes. Debit note entry must be kept for 72 months following the deadline for filing the annual return for the relevant year, per Section 36 of the CGST Act.
Process of issuing a debit note
- A debit note issued by a buyer: e.g., Kapoor Enterprises purchases 10,000 whistles on credit from Bansal Ltd. at Rs.15 per whistle. Bansal fulfills the order, and an invoice is provided to Kapoor Enterprises upon delivery. According to an inspection, four hundred thirty whistles are damaged, and 200 are defective. Kapoor Enterprises issues a debit note to Bansal Ltd. for the 630 whistles as payment. The debit note and the whistles’ return prove that Bansal Ltd. will have to deduct Rs.9,450 from the amount owed to Kapoor Enterprises (630 whistles x Rs.15).
- A debit note issued by a seller: e.g., Kapoor Enterprises purchases 10,000 whistles on credit from Bansal Ltd. at Rs.15 per whistle. Bansal delivers the package. The seller generates an invoice for the order provided to Kapoor Enterprises. Bansal Ltd., on the other hand, realizes that the rate per whistle in the invoice submitted to Kapoor Enterprises is Rs.14, understating the invoice by Rs.10,000. Bansal Ltd. then generates a debit note to be sent to Kapoor Enterprises, correcting the previously mentioned error.
Also Know About – GST Composition Scheme
Reasons to issue a debit note
A buyer issues a debit note to a seller if:
- The amount mentioned in the invoice is incorrect
- Receipt of defective/ damaged goods
- The value mentioned is overstated
- There is a cancellation of the purchase of goods/ services
- The delivered goods or services are not up to the buyer’s standard
A seller issues a debit note to the buyer if:
- The amount to be paid increases
- Understatement of the value of the invoice
- If there is an addition to the good or service provided
When is a Debit Note Issued?
In the Goods and Services Tax (GST) regime, a debit note is issued by a supplier to the recipient when the original tax invoice issued requires an upward revision in value or tax. It serves to notify the recipient that they owe more than what was originally billed.
As per Section 34(3) of the CGST Act, 2017, a registered supplier can issue a debit note when the taxable value or tax charged in the original invoice is less than what it should have been.
Common Scenarios for Issuing a Debit Note under GST:
- Underbilling or Incorrect Invoice Value
If the supplier realises that the amount charged in the original invoice was lower than the actual price, a debit note is issued to correct the discrepancy.
Example:
Original invoice value: ₹10,000
Actual value after re-check: ₹12,000
A difference of ₹2,000 is raised via debit note. - Additional Tax Liability
When tax is undercharged due to wrong classification or incorrect GST rate in the original invoice.
Example:
Tax was charged at 5% instead of 18%. The debit note will cover the additional 13%. - Supply of Extra Quantity of Goods or Services
If the supplier delivers more goods or provides more services than originally invoiced, a debit note is issued for the excess quantity or services.
Example:
Invoiced for 100 units but delivered 120 units. The extra 20 units are billed via debit note. - Change in Price After Invoice
If there is a price escalation due to market conditions or revised terms, a debit note may be issued to adjust the invoice accordingly.
Debit note- notebook or ledger
- When a separate book is maintained containing two copies of the debit notes, one of which is used by the supplier, the remaining one serves as a record. This record of two copies of a debit note is classified as a debit notebook.
- For an efficient tracking system, a credit note from a supplier is marked in the debit notebook against the debit note.
- Because the supplier receives one copy of the debit note, the supplier may use it as a reference point when issuing the credit note.
Get a Free Trial – Best Accounting Software For SMEs
Importance of debit notes in GST
A supplier of goods and services is required by Section 34(3) of the CGST Act 2017 to issue a debit note when-
- Issuing a tax invoice for the provision of goods and services
- The taxes charged on the invoice are less than the taxable value of the supply made.
- The quantity of goods/services supplied exceeds the initial agreed-upon commitment stated on the invoice.
A debit note’s inclusion in the information for GSTR-1, the month in which the supply of goods occurred, is one of its fundamental roles under GST. The same information appears on Forms GSTR-2A and GSTR-2B for the recipient. Once the verification is complete, the recipient may approve it and include it in their GSTR-3B. Previously, when reporting a credit or debit note, the original invoice number had to be quoted on the GSTN portal in Form GSTR-1 and Form GSTR-6.
On the other hand, the change regarding the separation of debit notes from their original invoice led to the following:
- A specific debit note or credit note’s place of supply can be specified to determine the kind of supply (intrastate or interstate).
- When a debit or credit note is issued solely for the difference in tax rates, the note’s value can be shown as zero. Simply entering the tax amount will suffice.
The delinking amendment also impacted the treatment of Input Tax Credit (ITC) for debit notes. Before the change, the deadline for filing an ITC claim was based on the date of the invoice rather than the day the debit note was issued. However, due to the amendment, the time limit for claiming ITC is now calculated based on the debit note date.
For instance, if an invoice was issued in March 2019 and a debit note was issued in October 2019, the due date for Form GSTR-3B for October 2020 would be the final date for claiming ITC since the debit note was issued during the fiscal year 2019-2020.
Amendments to debit notes
If a supplier’s invoice needs to be revised or changed, the change can be made through the GST portal. There are two cases involving amendments:
- Changes to debit/credit notes issued to registered individuals
The reporting requirements, in this case, must be entered in Form GSTR-1’s ‘Table 9C – Amended Debit/Credit Notes (Registered).’ - Changes to debit/credit notes issued to registered individuals
The reporting requirements, in this case, must be entered in Form GSTR-1’s ‘Table 9C – Amended Debit/Credit Notes (Unregistered).’
Time limit to issue a debit note
A debit note can generally be issued at any time. However, according to GST regulations, the debit note must be issued by the earliest of the following dates:
- Before or on September 30th of the fiscal year that comes after the one in which the goods and services were provided.
- On or before the deadline for filing the GSTR-9 (Annual Return) for the fiscal year
Tax liability, interest charges, and penalties will increase if the debit note is not issued within the allotted time.
Debit Note Format and Content
There is no prescribed legal debit note format in GST. However, some fields are required to be present:
- Supplier’s name, address, contact information, and GSTIN
- The serial number of the debit note
- The recipient’s name, address, contact information, and GSTIN
- The invoice reference number for which a debit note is issued
- Date the supplementary invoice was created
- Product Specification
- The document is a debit note, according to the header description.
- Document verification in the form of a digital signature
Get a Free Trial – Best Accounting Software For SMEs
Debit Note vs Credit Note
A Debit Note is issued by a buyer to a seller when goods or services are returned or when the amount due to the seller needs to be adjusted. It increases the payable amount. For example, if goods are damaged or incorrect, the buyer reduces the payment by issuing a debit note.
The seller issues a Credit Note to the buyer to acknowledge a return of goods or an overcharge. The note decreases the amount owed by the buyer. The seller uses a credit note to adjust the buyer’s account when goods are returned or a pricing error is made.
Debit Note increases the amount payable to the seller, and a Credit Note decreases the amount payable by the buyer.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
Frequently Asked Questions
- Why Are Debit Notes Issued?Debit notes are issued when a buyer needs to return goods or adjust the amount owed to the seller. This could happen due to damaged goods, incorrect quantities, or errors in pricing. The debit note increases the amount the buyer owes to the seller.
- Who Sends a Debit Note?The buyer sends a debit note to the seller. It is used when goods are returned, or there’s a need to adjust the invoice amount due to issues like incorrect billing or product damage.
- Is a Debit Note the Same As an Invoice?No, a debit note is not the same as an invoice. An invoice is sent by the seller to request payment, while a debit note is sent by the buyer to adjust the payment amount due to returns or errors.
