How important is the debit note under the GST law?

What is a debit note?

A debit note is a commercial document that usually contains a description of the goods sold or services provided and the terms of payment. It may also include documents establishing the terms of payment, such as a promissory note, guarantee, or purchase order. Hence a debit note is a very crucial document and while it may seem something as trivial as a cancelled cheque it serves numerous purposes and is also highly important in times of audits. You can visit Khatabook to learn more about cancelled cheques.

A debit note is often used to settle an account between two parties who have entered into a contract to provide goods or services. For example, if you sell your car to someone and agree to pay them in four months, you would create a debit note so that they can be sure you will pay them when due.

Why is a debit note issued?

A buyer issues a debit note to a seller in case of the following events

1. Amount stated in the invoice is incorrect

The buyer may issue a debit note to the seller for the amount stated in the invoice, which is incorrect. The buyer may also issue a debit note to the seller for the price of services that were not rendered as per the agreement.

2. Receipt of defective/damaged goods

  • When goods received do not measure up to the buyer’s expected standards, he/she may issue a debit note to the seller for such reasons as:
  • The delivery took much longer than expected and was delayed by couriers or other parties (the seller should be compensated for this loss).
  • The product received was damaged during transportation (the seller should be compensated for this loss).

3. Overstatement of the value of the invoice

A credit note is issued when an invoice contains an overstatement, i.e., it exceeds the actual cost of materials or labour involved in production or service delivery.

4. Cancellation of purchase of product/service

A debit note may be issued when you cancel your purchase before it has been delivered or if you fail to pay for any other reason (e.g., late payment).

5. Return of order in case of bad products

If a customer receives goods that do not measure up to the buyer’s expectations, the seller may issue a debit note. In this case, the seller will ensure that the customer is made aware of this fact and will cover any damages incurred as a result of this discrepancy. The customer should be able to return the product for an exchange or refund within seven days of receiving it. Any delay in returning the product will result in interest charges being incurred by both parties. If an item is damaged or defective upon delivery, then both parties can reach an agreement on how much compensation will be paid for any lost profits or other expenses incurred during shipping and handling.

What is the relevance of debit notes under the GST law?

Debit note and credit note both are extremely important under the GST law. Debit notes are issued by every supplier of goods and services as per Section 34(3) of the CGST Act 2017 in the following events:

  • When a tax invoice needs to be issued for the supply of goods and services
  • If the taxes that have been charged as per the invoice is less than the taxable value based on the supply that has been made
  • The quantity of goods or services that have been supplied is more than the agreed-upon quantity which has been mentioned in the invoice.

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