What is Debit Note in GST?

Since the advent of the GST (Goods and Services Tax), the taxation process in India has become more structured and standardised. The new tax routine also brought with it many new tax concepts. One such concept is the ‘debit note.’ A debit note is critical for all SMEs (small and medium-sized enterprises) to adhere to accounting standards.

 

A common term used in B2B (business-to-business) transactions, a debit note plays a vital role in rectifying accounting errors. Many buyers and sellers use it to address the inaccuracies and inconsistencies that happen in business transactions.

 

If you are wondering what a debit note is, how it works, and its significance in GST, then this guide is just for you.

 

What is a debit note?

 

A debit note is also commonly referred to as a debit memo. It is typically issued when an invoice needs corrections after the sale is completed. It is a financial document that mostly buyers and sellers use after the transaction is completed.

 

Why are debit notes issued?

 

Both buyers and sellers of goods and services can issue a debit note. However, the buyers and sellers may issue the debit note for different reasons.

 

Why does a seller issue a debit note?

 

• Invoice requires correction

  When the seller provides an invoice to the buyer after delivering the goods or services but mistakenly quotes a lower price per unit in the invoice.

   

• Mentioned the tax rates incorrectly

  Let us assume that a seller sent an invoice to the buyer and incorrectly mentioned 12% GST instead of 18% as applicable by the tax laws. So, to rectify and apply the revised GST rates in the invoice, the seller may issue a debit note to the buyer.

   

• Discrepancy in the invoice amount

  Let us assume that a business owner (a seller) correctly mentions the per-unit price in the invoice sent to the buyer. However, they commit a mistake in the total amount calculation. In such a situation, the seller can issue a debit note to the buyer to correct and change the total invoice amount.

   

  Why a buyer issues a debit note?

   

• Correction needed in the invoice

  After the sale transaction is finalised and the seller has raised an invoice, the amount mentioned in it is incorrect.

   

• Damaged goods

  When the buyer receives the delivery of the goods from the sellers and discovers that some or all of the items are damaged.

   

• Cancelling the transaction

  If, due to any unforeseen circumstances, the buyer cancels the purchase and returns all the goods to the seller.

   

  What is the format of a debit note?

   

  Now that you know the debit note meaning and the reasons why a seller and/or the buyer may issue the debit note, it would help to know the debit note format.

   

  As an SME manufacturing business owner in India, there is no specific debit note format that you must adhere to. However, the government authorities deem certain fields as mandatory, these include:

   

• Company details

  – You clearly mentioned the supplier or the buyer’s name, address and GSTIN number

• Serial number

  – All debit notes you issue must have an alphanumeric sequential code specifying the unique serial number corresponding to each debit note

• Associated invoice number

  – The debit notes you issue must also include the alphanumeric sequential code of the corresponding invoice

• Exact dates

  – The debit note must compulsorily have an invoice creation date and the debit note issuance date

• Legally authorised signatures

  – The debit note will be considered valid only if it is signed by the legally authorised signatories from the issuing party.

 

Debit Note in GST

 

As per Section 34(3) of the CGST Act, 2017, the supplier of goods and services can issue a debit note under the following circumstances:

 

• When the tax invoice is issued for the services or goods, but the tax rates as charged in the invoice are lower than the actual tax rates as per the tax laws
• When the quantity of goods and/or services supplies is more than the agreed quantity as mentioned in the contract or agreement
• While issuing a tax invoice for the supply of goods and/or services

 

The role of a debit note in GST comes into play when it forms a critical part of the details mentioned in the GSTR-1 for the month in which the good or services was supplied and when the same information is reflected in the Form GSTR-2A and GSTR-2B for the recipient’s review and submission in GSTR-3B.

 

Earlier, reporting a debit note and credit note in GST required the business owners to mention the original invoice number on the GSTN portals in the Forms like GSTR-1 and GSTR-6. However, the new amendments in the GST bill relating to the delinking of debit notes from the original invoice have resulted in the following changes:

 

• The debit note or credit note issued due to the difference in the tax rate can have a value of zero, as entering the correct tax amount will be enough
• The provided place of supply must be mentioned in the note to help identify the type of supply, i.e., whether it was an interstate or an intrastate supply

 

The GST amendment relating to delinking the debit note has also significantly influenced the Input Tax Credit or ITC treatment. Before the amendment in the GST bill, the time limit to claim the income tax credit was linked to the invoice date. However, after the amendment, it is aligned with the debit note issuance date.

 

Importance of Debit Note under GST Law

 

The GST law mandates all business owners to use the debit note only for specific situations in business transactions. A debit note issued by the seller to the buyer formally increases the amount owed on a previous purchase. So, this document plays a vital role in ensuring –

 

• Records accuracy—The debit note helps rectify errors in the original invoice, such as missing charges or miscalculations in the total amount, which may lead to inaccurate financial records for both parties (buyer and seller).
• Maintain complete transparency—Debit notes provide a clear and well-documented trail of the adjustments or corrections made to the initial invoice. Thus, they ensure complete transparency in business dealings between both parties involved.
• Stay compliant with the GST laws—Issuing a debit note for legal reasons like revised tax rates helps the business comply with the GST rules and regulations and avoid paying penalties unnecessarily.

 

Final Word

 

A debit note is a critical account document required by business owners to carry out several transactions. Typically, businesses maintain a separate debit notebook to keep records of the same, and they also keep two copies of each note, one for each party.

 

If you are an SME manufacturing business owner, you must have a deep understanding of debit notes. The Udyog Plus Payments Plugin can be used with your accounts software to provide a one-stop solution for all your accounting and banking needs. Integrating the Plugin can help you save a lot of time and effort in record keeping, allowing you to focus more on growing your business.