Debit Note and Credit Note: A Detailed Overview of GST Treatment

In India, the GST system's standardisation and matching of invoices help enhance tax enforcement and reduce the flow of illicit funds. When completing a GST return, all B2B invoices are required to be uploaded to the GST general repository. Based on the provided invoice information, the system automatically populates the buyer or receiver side with the data when completing the GSTR-2 or return of inward supplies. It thereby eliminates the chance of dishonesty in B2B bills. Under some conditions, though, businesses will have to actually amend a bill that has been sent out. In these situations, an invoice revision may be made by the supplier issuing a debit or credit note.

Meaning of Debit Note

A provider may issue a debit note according to Section 34(3) of the CGST Act, 2017, in situations where an increase in the taxable value or an increase in the amount of GST levied on the invoice is required. As soon as the supplier issues the debit note, their tax obligation will increase. Note that if the products are returned or are damaged during transit, the recipient may also issue a debit note. However, a debit note can only be issued by a provider under GST. In the following situations, the supplier of the products is required to issue a debit note:

When the goods or services' true value is more than the invoice figure
When the rate of GST or the taxable amount is less than what is appropriate for those goods or services

Debit Note in GST

In the following situations, the supplier must issue a debit note:

When the taxable value listed on the tax invoice is lower than the total amount that is subject to taxes
When the tax charged on the issued tax invoice is less than the real tax that needs to be paid.

The supplementary invoice is included in the debit note. If a debit note is issued, it must be reported in GSTR 1 for the relevant month. The receiver's GSTR 2A will automatically fill in the details; the recipient must then approve and submit the information in their GSTR 2. The recipient must accept the debit note in their Form GSTR 2 to provide a corresponding response regarding their tax liability.

The recipient may issue a debit note without adding GST. According to the statute, only the provider is authorised to issue debit or credit notes. To increase or decrease the supplier's GST liability, both notes may be issued with GST. If the recipient rejects the amount indicated on the supplier's invoice, the recipient's only alternative is to issue a debit note without GST; if not, his purchases will be inflated. The supplier does not issue credit notes.

Meaning of Credit Note

A registered person may issue credit notes according to section 34(1) of the CGST Act 2017 if supplies are returned, determined to be inadequate, or there is a decrease in the taxable value or the amount of GST charged on the invoice. As soon as the registered person issues the Credit Note, the supplier's tax obligation will decrease. In the following situations, the supplier of the products or services, or both, will give the recipient a Credit Note:

When the items or services' true value is less than the amount stated on the invoice
When compared to the relevant rate for the type of products or services, the tax amount or GST is imposed at a greater rate
Less than what was stated on the tax invoice was received by the recipient
The products that were given to the recipient were returned
The recipient determines that the services are inadequate

Credit Note in GST

If prices are lowered after supply, a credit note cannot be given with GST due to the price negotiation. Credit notes can be given in this situation without displaying GST. It will not be necessary to file this credit note with your monthly return. GST cannot be applied to the issuance of a bad debt credit note. Since the tax invoice does not include the buyer's GSTIN, a credit note cannot be provided with GST for B2C supplies.

The supplementary invoice is included in the credit note. Should a credit note be granted, it must be included in GSTR 1 for the month in which it is intended to be granted. The receiver's GSTR 2A will automatically fill in the details; the recipient must then approve and submit the information in their GSTR 2. Provided that the recipient approves the credit note data in his GSTR 2, the supplier will only be permitted to lower the tax liability.

Issue of Credit Note in Case of Expiry of Goods

A credit note may be issued by the manufacturer or supplier if the goods with expiration dates are returned to them. Under section (34)2 of the CGST Act, the manufacturer may issue a credit note with GST before September 30 of the subsequent year. Following the upload of this credit note, the recipient's tax liability will be modified. A credit note free of GST may be issued by the manufacturer or supplier if the goods are returned after September 30, of the following year. According to section 17(5)(h) of the IGST Act, the manufacturer must reverse the ITC due to the manufacture of the returned products if the manufacturer destroys them.

Format of Debit Note and Credit Note

There is no set format for debit or credit notes. Nonetheless, it needs to have the following required details:

"Debit Note" or "Credit Note"
The supplier's name, address, and GSTIN
The document's nature
A sequential serial number, consisting of letters, numbers, or special characters for a financial year
The date the document was issued
The registered recipient's name, address, and GSTIN or UIN
The unregistered recipient's name, address, and delivery address
Signature or digital signature of the provider or his or her authorised agent
Date and serial number of the associated tax invoice
Value of taxable supply of goods or services, rate of tax, and the amount of tax credited or debited to the receiver

When Should a Debit Note and Credit Note be Issued?

There is no set period within which Debit or Credit notes may be issued; they may be issued at any moment. The issued Credit Notes and Debit Notes must be disclosed in the filed GST returns. The following must be provided in exchange for the month for which the credit and debit notes were previously issued:

September after the end of the financial year in which the supply was made, or
The date, on which the annual report was furnished, whichever comes first.

The tax liability must then be adjusted in the way that is specified.

Difference between Debit Note and Credit Note

Financial tools called debit and credit notes are used in commercial transactions to document corrections or changes. We will summarize the differences between them:

Debit Note: If the amount owed to the seller increases, the buyer will issue a debit note to the seller. It basically serves as a record to notify the seller that the buyer's account has been enhanced or debited for the following reasons:

Return of products: When a customer sends back excess or defective goods to the vendor.
Overcharging: When a customer receives a bill that exceeds the true cost of the products or services.
Additional charges: If the invoice did not initially include any of the following costs: taxes, goods, etc.

It serves as an appeal for a credit adjustment to the account of the seller.

Credit Note: On the other hand, if the buyer's need to pay decreases, the seller will provide a credit note to the buyer. It is a record informing the buyer that the seller's account has been credited (reduced) for several reasons, including:

Returned goods: Recognising the buyer's return of the merchandise.
Overpayment: When a customer pays more for products or services than what is actually charged.
Discounts: Prearranged savings after the initial invoice is issued.

It serves as a request for a debit adjustment to be made to the buyer's account.

Impact of New GST Returns on Debit Note/Credit Note Reporting

The necessity to streamline and simplify the ordinary tax return filing process gave rise to the new GST return filing method. However, its implementation was put on hold. It is crucial to issue credit or debit notes to maintain transparency in the billing process for both sides. Credit-debit notes are relevant under GST and should be reported in the GST filings. This article will compare how credit notes and debit notes are reported under the new GST returns system that is currently being considered but not implemented.

Reporting of Debit Note/Credit Note under the Existing Filing System

Credit and debit notes were reported using GSTR-1 on the GST portal. It is classified into the following categories:

Credit/debit notes given to unregistered individuals (B2C suppliers): In Table "9B - Credit/Debit Notes (Unregistered)," it has to be reported. The necessary information is as follows:

The credit/debit note number
Original invoice date
Original invoice number
Type of invoice (debit, credit, or refund voucher)
Invoice value
Whether the supply can be taxed at a different percentage than the current rate of tax

Credit/debit notes for registered individuals (B2B supplies): Table "9B - Credit/debit notes (Registered)" is where this needs to be reported. The necessary information is as follows:

Note No. for debit or credit
The recipient's GSTIN
Original invoice date
Original invoice number
Type of invoice (debit, credit, or refund voucher)
Invoice value
Type of supply (interstate or intrastate)
Whether the supply qualifies for taxation at a different percentage of the current tax rate, as informed by the government

Reporting of Debit Note/Credit Note under New Filing System

Under the new return filing procedure, credit or debit notes must be reported using Form GST ANX-1. The reporting entails:

Credit/debit notes given to unregistered individuals (B2C suppliers): Table "3A: Supplies made to consumers and unregistered persons (net of debit/credit notes)" is where the taxpayer is required to declare this. The table makes it clear that supplies must be declared net of any debit or credit notes. It is not necessary to make the declaration at the invoice level because it pertains to B2C supplies. The location of supply, tax rate, taxable value, and tax amount under each head—IGST, CGST, SGST, UTGST, and Cess—are the details that must be included in this table.

Credit/debit notes given to unregistered individuals (B2B suppliers): Table "3B: Supplies made to registered persons (other than those attracting reverse charge) (including edit/amendment)" must contain these details. Given that the declaration is made at the invoice level, the supplies do not need to be reported on a net basis. GSTIN/UIN, location of supply, HSN Code, document data (type, CDN number, value and date), taxable value, tax rate, and tax amount under each category (IGST/CGST/SGST/UTGST/Cess) should also be mentioned provided in this table. A credit or debit note must be chosen from the "Document Type" drop-down menu in order to be provided.

The proposed new system allows for the declaration of credit/debit notes to registered persons in the same table as outgoing supplies, whereas the current return filing system has a separate table for this purpose.

Revised Invoice under GST

All taxable merchants are required by GST to apply for temporary registration and complete all necessary paperwork to obtain a permanent registration certificate. The dealer must produce a corrected invoice for every invoice that is issued between the date the registration certificate is issued and the date the GST is implemented. Within one month after the certificate of registration's issuance date, this amended invoice must be sent out.

Conclusion

Ensuring precision in managing the debit and credit notes supports the company's dedication to openness. It also aids in the company's compliance with legal requirements. A careful process for receiving and issuing the notes will guarantee smooth transaction reconciliation. Moreover, it increases stakeholder trust. Every organisation may safely negotiate the many nuances of credit and debit notes, promote long-term growth, and maintain compliance status by implementing the right procedures.

FAQ

Q1. How should debit and credit notes be reported in GSTR1?

Debit and credit notes are required to be reported in GSTR 1 Table 9C. The note number, note date, site of supply, kind of supply, original invoice date, original invoice number, note type, taxable amount, and note value are among the details you must provide in your report.

Q2. What is the time limit for issuing debit and credit notes?

The period within which a debit or credit note may be issued is not specified. It can be distributed as needed.

Q3. What happens when you do not report debit and credit notes correctly?

Interest and penalty fees may result from inaccurately reporting debit and credit notes. Furthermore, if the input tax credit is not properly documented, the buyer might not be able to claim it for all of the amounts shown in the debit and credit notes.

Q4. Who can issue a debit note?

If the buyer is undercharged or the seller has sent extra products, the seller will send debit notes to the buyer.

Q5. What is the relation of debit/credit notes with GST?

The credit or debit note, as soon as it is issued, must be included in the GST forms in order to amend the tax liability.

Q6. Does the registered person issuing a debit note or credit note have to declare it in their return?

Yes, in the supplier's return for the month in which the credit or debit note was issued, the data must be declared.

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