Under the GST regime, debit notes help in adjusting the taxable value and tax charged on the original supply. This ensures accurate tax reporting and compliance with GST laws, facilitating proper calculation of CGST, SGST, and IGST as per the GSTN system.
What is a debit note in GST?
A debit note is a document issued by a supplier under Section 34(3) of the CGST Act, 2017, when there is a need to increase the taxable value or the GST charged on an invoice.
When the supplier issues a debit note, their tax liability will increase accordingly.
Reasons for issue of a debit note
- Incorrect price charged in the original invoice.
- Increase in the quantity of goods or services supplied post the original invoice.
- Revision of tax rates applicable to the goods or services supplied.
- Correction of any error or omission in the original invoice.
- Additional supply was made which was not included in the original invoice.
- Compliance with specific GST law amendments that require adjustments.
- Discrepancies in the initial assessment of goods or services leading to undercharging.
When a debit note is issued?
- When there is an undercharging in the original invoice.
- When the supplier raises the taxable value of the goods or services post the original invoice.
- When additional goods or services are supplied after the issuance of the original invoice.
- When there is an error in the original invoice, leading to a need for a correction.
- When tax rates are increased post the issuance of the original invoice.
- When there is an increase in quantity supplied that wasn’t included in the original invoice.
- When the recipient is undercharged for any other reason under the GST law.
Process of issuing a debit note
- Identify the need for issuing a debit note due to discrepancies in the original invoice.
- Create the debit note including the reference to the original invoice.
- Include details such as the revised amount, additional taxes (CGST, SGST/UTGST, IGST), and reasons for the debit.
- Ensure the debit note is in compliance with GST regulations and includes the GSTIN of both supplier and recipient.
- Record the debit notes in the accounting books of both the supplier and recipient.
- Report the debit note in GSTR 1 by the supplier and match it with GSTR 2A and GSTR 2B of the recipient.
Format and contents of a debit note
As an SME manufacturer in India, there is not a prescribed debit note format to adhere to, but authorities deem certain fields essential. These include:
- Title “Debit note” is clearly mentioned.
- Unique serial number for identification.
- Date of issue of the debit note.
- Supplier’s name, address, and GSTIN.
- Recipient’s name, address, and GSTIN.
- Reference to the original invoice number and date.
- Detailed description of goods or services.
- Quantity and value of the additional goods or services.
- Taxable value and applicable taxes (CGST, SGST/UTGST, IGST).
- Reason for issuing the debit note.
Steps to create a debit note
A debit note is a document used by a buyer to formally request a reduction in the amount payable to a seller due to issues such as incorrect goods or services, overcharging, or defective items. Here are the key steps to create a debit note:
- Title the document: Start by clearly labelling the document as a "Debit Note" at the top.
- Include debit note number: Assign a unique reference number for tracking and future reference.
- Date of issue: Mention the date when the debit note is created.
- Buyer and seller details: Include both the buyer's and seller's names, addresses, and contact information.
- Reference invoice number: Provide the original invoice number that the debit note relates to. This helps link the debit note to the corresponding transaction.
- Reason for debit note: Clearly explain the reason for issuing the debit note, such as overcharging, damaged goods, or return of goods.
- Description of items: List the items or services being returned or adjusted, including quantity, unit price, and total amount.
- Amount to be adjusted: State the total amount that needs to be deducted from the original invoice or payment.
- Terms and conditions: If applicable, include any payment terms or conditions regarding the adjustment.
- Sign and approve: The buyer or authorised person should sign the document to validate it.
Time limit to issue a debit note
- Debit notes must be issued before the September return filing of the following financial year.
- Alternatively, it must be issued before the annual return filing, whichever is earlier.
- This ensures timely adjustments and compliance with GST laws.
- Helps in accurate reporting of tax liabilities and input tax credits.
- Ensures that all discrepancies are resolved within a stipulated timeframe.
- Supports businesses in maintaining up-to-date financial records.
- Prevents long-drawn corrections and reconciliations in future periods.
Amendments to debit notes
- Recent GST amendments allow separate reporting of debit notes from the original invoice.
- Changes in the time limit for reporting debit notes under GST.
- Modifications in the format and content requirements for debit notes.
- Revised rules regarding the matching of debit notes with GSTR 2A and GSTR 2B.
- Enhanced clarity on input tax credit adjustments related to debit notes.
- Updated guidelines for reporting debit notes in GSTR 1 and GSTR 6.
- Adjustments in the compliance procedures for businesses under the new GSTN updates.
Debit note book or ledger
A separate record known as the debit note book is maintained, with two copies of each debit note. One copy is provided to the supplier, while the other is kept in the debit note book as a record.
When a credit note is received from the supplier, it is matched and marked against the corresponding debit note in the book, ensuring an efficient system for tracking and reconciliation.
As the supplier retains one copy of the debit note, they can refer to it when issuing the credit note.
Importance of debit note under the GST law
- Ensures accurate tax reporting and compliance under GST law.
- Facilitates proper adjustment of taxable value and tax amounts.
- Helps in maintaining transparency and accuracy in business transactions.
- Allows suppliers to correct mistakes in the original invoice legally.
- Aids in the reconciliation process between GSTR 1, GSTR 2A, GSTR 2B, and GSTR 3B.
- Ensures both supplier and recipient are on the same page regarding the transaction value.
- Supports the mechanism of claiming and adjusting input tax credit correctly.
Difference between debit note and credit note
- Debit note: Issued to indicate an additional amount is due from the recipient.
- Credit note: Issued to indicate a reduction in the amount payable by the recipient.
- Debit note: Adjusts undercharged amounts in the original invoice.
- Credit note: Adjusts overcharged amounts in the original invoice.
- Debit note: Results in an increase in the taxable value and tax amount.
- Credit note: Results in a decrease in the taxable value and tax amount.
- Debit note: Reported in GSTR 1 and matched with GSTR 2A, GSTR 2B.
- Credit note: Reported in GSTR 1 and matched with GSTR 2A, GSTR 2B.
Conclusion
Understanding the nuances of debit notes is crucial for businesses to ensure compliance with GST laws. Proper issuance and reporting of debit notes facilitate accurate tax calculations and adjustments, maintaining the integrity of financial transactions. Additionally, being aware of recent GST amendments, and the correct time limits, and ensuring the format and contents are in order, businesses can avoid discrepancies and potential legal issues.
