Credit and Debit Notes and Section 16(4)

INTRODUCTION-

In the realm of Goods and Services Tax (GST), credit and Debit notes play a pivotal role in the adjustment of tax liabilities. These instruments are used to correct discrepancies in invoices issued during a Tax period. Section 16(4) of the GST Act, on the other hand, stipulates a time limit for claiming Input tax credit (ITC). This provision has significant implications for businesses, particularly those that delay in filing their returns. Understanding these aspects is crucial for maintaining compliance and optimizing tax benefits under the GST regime. This article aims to provide an overview of credit and Debit notes, and the impact of Section 16(4) on the availability of ITC.

Let’s first discuss individually what legal provisions exist with regards to Credit notes and Debit notes

Credit noteS

The issue of Credit notes is dealt with by provisions of Section 34(1) & (2) extract of which is reproduced as under-

“(1) Where one or more tax invoices have 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 exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the Registered person, who has supplied such goods or services or both, may issue to the recipient one or more Credit notes for supplies made in a financial year containing such particulars as may be prescribed.

(2) Any Registered person who issues a Credit note in relation to a supply of goods or services or both shall declare the details of such Credit note in the return for the month during which such Credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:

Provided that no reduction in Output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.”

As per the provisions of Section 34(1) Credit notes can be issued only in cases where the Taxable Value and Tax charged in the invoices exceed the actual sum or where the goods and/or services are found to be deficient or are returned back to the supplier. However the Flyer on Credit notes issued by CBEC also mentions that credit notes can also be issued for reasons other than specified in the Section. Extracts of which is reproduced as under-

“A supplier of goods or services or both is mandatorily required to issue a tax invoice. However, during the course of trade or commerce, after the invoice has been issued there could be situations like:

• The supplier has erroneously declared a value which is more than the actual value of the goods or services provided.

• The supplier has erroneously declared a higher tax rate than what is applicable for the kind of the goods or services or both supplied.

• The quantity received by the recipient is less than what has been declared in the tax invoice.

• The quality of the goods or services or both supplied is not to the satisfaction of the recipient thereby necessitating a partial or total reimbursement on the invoice value.

• Any other similar reasons.

In order to regularize these kinds of situations the supplier is allowed to issue what is called as credit note to the recipient. Once the Credit note has been issued, the tax liability of the supplier will reduce.”

Format and Particulars of Credit note

While there is no prescribed format for a Credit note, it must contain the following particulars:

• Name, address, and Goods and Services Tax Identification Number (GSTIN) of the supplier.

• Nature of the document (Credit note).

• A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters hyphen or dash and slash symbolized as “-” and “/” respectively, and any combination thereof, unique for a financial year.

(d) date of issue;

(e) name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient;

(f) name and address of the recipient and the Address of delivery, along with the name of State and its code, if such recipient is un-registered;

(g) serial number and date of the corresponding tax invoice or, as the case may be, bill of supply;

(h) value of Taxable supply of goods or services, rate of tax and the amount of the tax credited to the recipient; and

(i) signature or digital signature of the supplier or his Authorised representative.

Time Limit for Issuing a Credit note

The time limit for issuing a Credit note is governed by Section 34(2) of the CGST Act, 2017. According to this section, a Credit note must be issued by the supplier:

• On or before the 30th day of November following the end of the financial year in which such supply was made.

• Or the date of furnishing of the relevant annual return for the financial year, whichever is earlier.

It’s important to note that the supplier’s Output tax liability will be reduced once the Credit note is issued and matched. However, no reduction in Output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

This restriction on issue of Credit note has created a lot of trouble for taxpayers sometimes detection of error in invoicing or settlement in case of disputes may take up some time. To tackle this issue businesses are now finding innovative ways. One of the most common and prevalent practise is to issue Credit notes to subsequent invoices for which the above mentioned time limit has not expired to give effect to any adjustment that is required to be made in the tax Invocie of the period for which Credit notes cannot be issued

Debit noteS

The issue of Debit notes is dealt with by provisions of Section 34(1) & (2) extract of which is reproduced as under-

“(3) Where one or more tax invoices have 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, the Registered person, who has supplied such goods or services or both, shall issue to the recipient one or more Debit notes for supplies made in a financial yearcontaining such particulars as may be prescribed.

(4) Any Registered person who issues a Debit note in relation to a supply of goods or services or both shall declare the details of such Debit note in the return for the month during which such Debit note has been issued and the tax liability shall be adjusted in such manner as may be prescribed.

Explanation.—For the purposes of this Act, the expression "Debit note" shall include a supplementary invoice.”

A Debit note is a document issued by a supplier of goods or services to the recipient, indicating that the recipient owes the supplier money for certain reasons. These reasons could include:

1. The supplier has declared a value which is less than the actual value of the goods or services provided.

2. The supplier has declared a lower tax rate than what is applicable for the kind of the goods or services or both supplied.

3. The quantity received by the recipient is more than what has been declared in the tax invoice.

4. Any other similar reasons.

In these situations, the supplier is allowed to issue a Debit note to the recipient. The Debit note also includes a supplementary invoice.

Format and Particulars of Debit note

While there is no prescribed format for a Debit note, it must contain the following particulars:

1. Name, address, and Goods and Services Tax Identification Number (GSTIN) of the supplier: This identifies the issuer of the Debit note.

2. Nature of the document: This indicates that the document is a Debit note.

3. A consecutive serial number not exceeding sixteen characters, in one or multiple series: This number should contain alphabets or numerals or special characters hyphen or dash and slash symbolized as “-” and “/” respectively, and any combination thereof, unique for a financial year.

4. Date of issue: The date when the Debit note was issued.

5. Name, address, and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient: This identifies the recipient of the Debit note.

6. Name and address of the recipient and the Address of delivery, along with the name of State and its code, if such recipient is un-registered: This is required when the recipient is unregistered.

7. Serial number and date of the corresponding tax invoice or, as the case may be, bill of supply: This links the debit note to the original tax invoice or bill of supply.

8. Value of Taxable supply of goods or services, rate of tax and the amount of the tax debited to the recipient: This indicates the additional tax liability.

9. Signature or digital signature of the supplier or his authorized representative: This validates the Debit note.

Time Limit for Issuing a Debit Note

The time limit for issuing a Debit note is not explicitly mentioned in the GST Act. Therefore Debit notes can be issued at any time but the claim of ITC in the hands of recipient shall be provisions of Section 17(5)(i) which states that where any tax is paid by the supplier in accordance with the provisions of sections 74, 129 and 130, the recipient shall not be entitled to claim of ITC. So in case a Debit note is issued by Supplier in pursuance of provisions of the above mentioned sections the recipient shall not be entitled to claim Input tax credit in respect of such Debit notes.

Applicability of Section 16(4) on Debit notes

Section 16(4) of the CGST Act was amended with effect from 01.01.2021, so as to delink the date of issuance of Debit note from the date of issuance of the underlying invoice for purposes of availing Input tax credit34.

Provision Prior to Amendment

Before the amendment, Section 16(4) of the CGST Act stated that 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 returns under section 39 for the month of September following the end of the financial year to which such invoice or invoice to which such Debit note relates pertains.

Impact of the Amendment

With effect from 01.01.2021, Section 16(4) of the CGST Act was amended so as to delink the date of issuance of Debit note from the date of issuance of the underlying invoice for purposes of availing Input tax credit.

This means that the date of issuance of the Debit note (not the date of the underlying invoice) determines the relevant financial year for the purpose of Section 16(4) of the CGST Act. The availment of Input tax credit (ITC) on Debit notes in respect of the amended provision shall be applicable from 01.01.2021.