There comes a time when humans err in making an entry or a transaction. These cases often lead to anomalies and a further reconciliation is required between the interacting parties to make correct, such anomalies. This can happen due to a machine malfunction as well. Such an erroneous situation leads to the creation of what we call as Debit Notes or Credit Notes, wherever applicable.
Whenever there are value related errors, these documents come into play. Whether it is an upward revision or a downward revision in prices, they are always catered with the help of debit or credit notes. It is not just in India that these documents are used, but are used across the globe in generally accepted accounting parlance.
In this article, we’ll explain what are debit notes and credit notes in the context of GST. Find out, in which situations you should create these vouchers.
What are Debit Notes?
An invoice is raised whenever there is a purchase or sale transaction with a consideration. When such consideration falls short due to certain anomalies, or extra goods being delivered to the purchaser, then the seller shall issue a debit note in that case. Such a debit note will take care of the upward revision of prices in an already issued invoice and will intimate the purchaser of the future liability that he has to pay.
Debit notes are raised in cases where there is a tax invoice issued, but the taxable value of the goods therein changes after such issuance. Similarly, there can be a tax invoice issued but a number of tax changes after such issuance. In both these cases, a seller has to intimate the purchaser about such change.
There is no specified format to issue a debit note, but it can be issued as a letter or a formal document. It is mostly a document specifying future liability and having commercial implications. They increase the credit period of a transaction, but are affected after shipping of goods takes place.
There can be a situation where a purchaser is returning the goods on account of some quality issues, or shortage of quantities, etc. In such cases also, a debit note is raised to account for the difference. The physical movement of goods is taking place without any payments actually being made.
Debit notes are also helpful in identifying through the books of accounts, any movement of stocks between the transacting parties. These notes do not have to be paid instantaneously but have to be settled at a later date.
Debit Notes Under GST
GST takes care of all the changes made in a transaction. It is obvious to have a free flow of credits to the last mile in a GST environment. Hence, dealers and assessees have to follow a tough regime of uploading and updating every single transaction that they enter into.
Since debit notes are a major change to an invoice, they have to be reported separately in the GST returns. Debit notes are explained under section 2(36) of the Model GST Law.
Debit notes can be raised in GST under two situations:
- When the amount of taxable value of the goods changes after issuance of invoice
- When a number of tax changes after issuance of invoice
The following things are to be maintained in the debit note, for proper update and reporting. Although there is no predefined format for the same, necessary care has to be taken to mention these important details in the debit notes.
- Name and address of the dealer supplying the goods or services
- GST Identification Number (GSTIN) of the supplier
- Nature of the document – DEBIT NOTE in bold, capital letters.
- Unique serial number assigned to the document
- Date of the document
- Name and address of the recipient of goods or services
- GST Identification Number (GSTIN) of the recipient
- When the recipient is an unregistered person, then name and address of place of delivery.
- The corresponding original tax invoice to which the debit note relates to
- Changes in taxable value of the goods or services, or changes in tax amount, as the case may be, for which such debit note is being raised.
- Digital signature for online debit notes or physical signatures for paper-based documents.
The details of debit notes have to be declared in the month following the month on which such debit note has been raised. Debit notes can be issued anytime without any time limit.
What are Credit Notes?
Similar to the debit notes, credit notes are issued when there is a downward revision in prices of goods or services supplied. It can be compared to a negative invoice that has the ability to nullify the effects of an invoice. It offers a reduction in the value of the invoice and thus, reduces the liability of the purchaser. It is often inflicted with a return of goods to the supplier. It always has a negative impact on the accounting balance in the books of the seller.
Sometimes, the purchaser is unhappy with the quality of product shipped to him. In that case, he shall return the goods to the supplier, and in return, the supplier issues the purchaser, a credit note to the extent of the value of the goods being returned. There is no predefined format in which the credit note has to be issued; rather it is an intimation to the purchaser about such credit being offered.
Credit Notes Under GST
GST takes care of credit notes as well, just like debit notes. Credit notes have to be issued by a taxable person, where there is a shortage of products supplied and for which there is no payment to be made by the purchaser. Since it has a commercial impact, the same has to be informed or declared in GST returns in the month to which it prevails.
The credit note has to be issued based on an original invoice already issued. The original invoice will get reduced to the extent of such credit notes. In some cases, the original invoice value can become zero. Credit notes are defined in section 2(35) of the Model GST Law.
Credit notes can be issued in the following cases:
- When the goods are returned by the recipient
- When the supplier has charged excessive tax, where a lower rate should have been charged.
- When the goods supplied are of inferior quality, and the same are returned to the supplier
Credit notes must also mention the details as noted above in case of debit notes. The particulars are the same in this case as well. Such credit notes must be mentioned in the returns of the following month about which the credit note has been raised. Unlike debit notes where there is no time limit for issuance, credit notes have to be declared in earlier of the following dates:
- Annual return filing date or,
- By the 30th of September, following the year to which credit notes relate to.
From the above we can analyse that the due date of filing of annual return is 31st December and where the annual return is filed after 30th September, then the credit notes have to be declared on 30th September.
Where the input tax credit and interest on such invoice is already passed on to other registered person, then such credit note shall have no effect on reduction of output tax liability.
How to create Credit Note or Debit Note
You can easily create credit note in ProfitBooks from an invoice. Reference of that invoice will be mentioned on the credit note. Similarly, a debit note can be created from a purchase entry.
ProfitBooks is GST compliant accounting software and takes care of the mandatory fields. These transactions will be available under respective GST returns automatically.
Apart from this, you can also create GST invoices from ProfitBooks and comply with GST laws better.Try ProfitBooks FREE Now