This blog is written by Mr. M. Shafaat Ali, Assistant Manager Taxation Advisory Services. Please read this blog and provide your valued comments.

Debit & Credit Note under Section 9 of the STA, 1990

Definition

Where a registered person has issued a tax invoice in respect of a supply made by him and as a result of cancellation of supply or return of goods or a change in the nature of supply or change in the value of the supply or some such event the amount shown in the tax invoice or the return needs to be modified, the registered person may, subject to such conditions and limitations as the Board may impose, issue a debit or credit note and make corresponding adjustment against output tax in the return.

Debit Note

A Debit Note is used to reflect that a debit has been effected to the account of the other party.

Credit Note

A Credit note is used to reflect that a credit has been effected to the account of the other party.

A debit note or a Credit Note can be issued in 2 situations –

  1. When the amount payable by buyer to seller decreases –There can be a change in the value of goods after the goods are delivered and invoice is issued by the seller. This can be due to a return of goods or due to the bad quality of the goods delivered, etc. In this case, the value of goods decreases due to which a Debit Note is issued by the purchaser to the seller. The Debit Note provides details of the amount of money debited from the sellers’ account and also states the reason for the same. The reason behind this – In the purchaser’s books of account the seller will have a credit balance. When a debit note is issued the credit balance of the Sellers account decreases, thus reducing the seller’s balance. It means that that lesser amount is required to be paid by the buyer to the seller to settle his liability. Thus debit note reduces the liability for the buyer. The seller issues a Credit Note as a response or acknowledgment to the Debit Note
  2. When the amount payable by buyer to seller increases-When the value of invoice increases due to extra goods being delivered or the goods already delivered have been charged at an incorrect value a Debit Note is required to be issued. The Debit Note, in this case, is issued by the seller to the buyer. And the buyer as an acknowledgment to the receipt of Debit Note issues a Credit Note. The reason behind this – In the seller’s books of account the buyer will have a debit balance. When a debit note is issued the debit balance of the buyer’s account increases. It means that more amount is required to be paid by the buyer to the seller to settle his liability. Thus, credit note increases the liability for the buyer.

Cases Where Debit note has to be issued by the Supplier

  • Original tax invoice has been issued and taxable value in the invoice is less than actual taxable value
  • Original tax invoice has been issued and tax charged in the invoice is less than actual tax to be paid.

Cases Where Credit note has to be issued by the Supplier

  • Original tax invoice has been issued and taxable value in the invoice exceeds actual taxable value
  • Original tax invoice has been issued and tax charged in the invoice exceeds actual tax to be paid.
  • Recipient returns the goods to the supplier
  • Services are found to be deficient

Components of Debit/Credit Note (Cancellation or Return of Supply)

  • name and National Tax Number of the recipient
  • name and National Tax Number of the supplier
  • number and date of the original sales tax invoice
  • the reason of issuance of the Debit Note; and
  • Signature and seal of the authorized person issuing the note.

Components of Debit/Credit Note (Change in Value of Supply or Amount of Sales Tax)

  • name and National Tax Number of the recipient
  • name and National Tax Number of the supplier
  • number and date of the original sales tax invoice
  • the original value and sales tax as in original invoice
  • the revised value and sales tax
  • the difference of value and sales tax adjustable
  • the reason for revision of value
  • Signature and seal of the authorized person issuing the note.

In the case of cancellation of supplies made to, or return of goods by, an unregistered person, the supplier shall issue a credit note.

Where, for any valid reason, the value of supply or the amount of sales tax mentioned in the invoice issued has decreased, the supplier shall issue a Credit Note (in duplicate), with the same particulars as specified above.

Adjustment of Input and Output Tax Under Rule 42 of STR 2006

  • The buyer shall not be entitled to claim input tax in respect of the supply which has been cancelled or returned to the supplier or in respect of which the amount of tax was reduced.
  • If the buyer has already claimed input tax credit in respect of such supplies, he shall reduce or increase the amount of input tax by the corresponding amount as mentioned in the Debit Note or Credit Note, as the case may be, in the return for the period in which the respective note was issued.
  • Where the supplier has already accounted for the output tax in the sales tax return for the supplies against which Debit Note was issued subsequently, he may increase or reduce the amount of output tax by the corresponding amount as mentioned in the Debit Note, in the return for the period in which the respective note was issued
  • In case of return of supplies by an unregistered person, the adjustment as aforesaid can be made against the Credit Note issued by the supplier.
  • The adjustments can only be made if the corresponding Debit Note or Credit Note is issued within one hundred and eighty days of the relevant supply
  • Provided that the Collector of Sales Tax may, at the request of the supplier, in specific cases, by giving reasons in writing, extend the period of one hundred and eighty days by a further one hundred and eighty days.
  • Where the goods relating to a returned or cancelled supply are subsequently supplied to the original buyer or some other person with or without carrying out any repairs, the supplier shall charge sales tax thereon in the normal manner and account for it in his return for the period in which these goods were supplied.

M. Shafaat Ali