Availability of input tax credit on debit notes

• Goods and Services Tax (GST)
• ||
• November 17, 2021

An input tax credit means claiming the credit of the GST paid on the purchase of goods and services utilized to further business. The mechanism of an input tax credit is the backbone of GST and is one of the most prime basis for the introduction of GST. It is a pretty common practice that goods and service tax (GST) registered suppliers of goods and services are required to amend the original prices charged for a supply with a retrospective effect due to various reasons. In these circumstances, where the value of supply mentioned in the actual invoice is lower than the amended amount, a debit note is issued to affect the increased prices. The debit note may include information about an immediate payment or may serve as a reminder of current funds due. Further, the GST law does not provide any time threshold to issue debit notes.

Before amendment in finance act, 2020:
According to provisions of section 16(4) of the CGST Act, a registered person will not be authorized to take the input tax credit (ITC) concerning any invoice or debit note for granting of goods or services or both after the due date of furnishing of the return under section 39 for September following the end of the financial year to which such invoice or invoice relating to such debit note operates or bestowing of the applicable annual return, whichever is prior. 

In other words, the segment yields that ITC on the debit note can be affirmed till earlier of the following circumstances:

1. The date of giving annual return or
2. The return for September

For the next calendar year to which the corresponding invoice of such debit note is related. Thus, the ITC on the debit note is linked with and dependent on the corresponding invoice. The above provision can be explained with the help of an example. For, e.g. if a tax invoice was initially issued on 5^th June 2020 and the corresponding debit note was issued on 10^th October 2021, then the receiver of debit note cannot avail ITC of the debit note issued as the ITC on such debit note can be availed only till filing of GST returns for 21st September as generally the date of filing of annual return for FY 2020-21 would be after September 2021 only.

This led to an increase in the cost of the receiver of the goods or services, and hence, a concern was raised against this provision by the industry to the GST lawmakers, which led to an amendment in the aforesaid provision.

After the amendment in finance act, 2020:
Section 16(4) has been modified to provide that a registered individual shall not be authorized to grab the input tax credit in respect of any bill or debit note for the supply of merchandise or assistance or both after the target date of furnishing of the return under section 39 for September following the end of the financial year to which such bill or debit note is concerned or furnishing of the appropriate annual return, that is prior. 

In other words, the modified section provides that ITC on the debit note can be affirmed till earlier of the following circumstances:

1. The date of conferring of annual return or
2. The remit for September for the next financial year to which the debit note is related.

The said alteration has been introduced to delink the invoice and debit note to claim ITC. In the hue of the above-mentioned provisions, it can be ceased that ITC shall be obtainable on the debit notes, which are provided in the following financial years of the corresponding invoice. Also, the corresponding invoice shall not be considered to determine the last date of claiming ITC on debit notes. It can be demonstrated with the support of the following specimen:

At AJSH, we assist our clients with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming & GST audits) by providing them adequate support and guidance from our end. If you have any questions or would like to know more about the availability of ITC on debit notes, kindly contact us.