Tax Invoicing

What are Credit Notes?

Credit notes are issued when there is a downward revision in prices of goods and/or services supplied to the customer. It is a kind of  a negative invoice that has the ability to nullify the effects of that particular invoice. It is often counted as a return of goods to the supplier. It always has a negative impact on the accounting balance in the books of the seller.

In many most common scenarios, wither the purchaser is not happy with the good or service provided by seller, or the purchaser wants to change the item of good or type of services. In such case, the purchaser returns the good to the seller and in return the seller/supplier provides a credit note for this particular good or service to the purchaser. Credit Nots is rather a single written intimation to the purchaser about such credit is being offered to the customer / purchaser. Making this more simpler, Credit Note issued means that the said amount is deposited in sellers book of accounts which seller can either refund(as per terms and conditions) and/or can utilise the same amount in next invoicing of other product or services offered to same client.

Credit Notes under GST

Credit notes are taken care by GST and also has an impact on GST filing and are to be informed or declared in the GST Return Filing of Invoices of that particular month.  There are some simple steps or rules to be followed.

  1. Credit note gas to be applied only to the Original GST invoice Issued. In such case the original GST invoice value becomes zero as well.
  2. Taxable value present in the invoice is more than the actual taxable amount or
  3. Tax charged in the invoice is more than actual tax payable
  4. Recipient returns the goods to the supplier(sales return)
  5. Goods are found deficient or not as per satisfaction of the buyer

In the above situation, the liability to pay the amount by recipient reduces and hence debit note is issued by them and as an acknowledgment to debit note, credit note is issued by the supplier. As in the books of the recipient, supplier account has a credit balance and by issuing the debit note credit balance will be reduced. In other words, we can also say that recipient is reducing the liability.

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 the amount 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 Note 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(38) of the  GST Law.

The word debit note also includes supplementary invoice, it is issued when the-

  • Taxable value present in the invoice is less than the actual taxable amount or
  • Tax charged in the invoice is less than the actual tax payable

Value of invoice increases due to extra goods/services are delivered or incorrect amount( taxable value/tax) is entered in the invoice. In this case, the supplier will issue debit note. As in the books of the supplier, customer account has the debit balance and on accounting of debit note, customer account balance be will increase. The customer gives credit note on receipt on the debit note to the supplier. The credit note will increase the liability in the books of the customer, as he has pay an extra amount to settle the liability.

How to Create Debit Note or Credit note in OFFIIO?

You can easily create Credit Note by selecting an invoice under Tax Invoices section of OFFIIO and the same way you can create a Debit Note by selecting an invoice from your vendor. Rest all the calculations and reporting of GST will be taken care by OFFIIO.

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