Availability of ITC on Debit Notes

Introduction

It is a very common practice in business to revise the prices charged for supply with a retrospective effect. In such cases, where the value of supply declared in the original invoice is lower as compared to the revised amount, a debit note is issued to give effect to the increase in prices. Further, the law does not provide any time limit to issue debit notes.

Now, the question of law here is whether the input tax credit (‘ITC’) would be available on the tax component related to such debit notes. If yes, what will be the maximum time limit up to which such ITC can be availed.

Relevant Legal Provisions

Before amendment made through the Finance Act, 2020

Section 16(4) of the CGST Act, 2017 provides that a registered person shall not be entitled to take ITC in respect of any invoice or debit note for the supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of the financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

In other words, the section provides that ITC on the debit note can be claimed till earlier of the following events:

• • the date of furnishing of annual return or
  • the return for the month of September

for next financial year to which the corresponding invoice of such debit note is related.

Thus, the ITC of the debit note is linked with and dependent on the corresponding invoice.

After the amendment made through the Finance Act, 2020

Section 16(4) has been amended to provide that a registered person shall not be entitled to take the input tax credit in respect of any invoice or debit note for the supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

In other words, the amended section provides that ITC on the debit note can be claimed till earlier of the following events:

• • the date of furnishing of annual return or
  • the return for the month of September

for the next financial year to which the debit note is related.

The said amendment has been introduced to delink the invoice and debit note for the purpose of claiming ITC.

In light of the above provisions, it can be concluded that ITC shall be available on the debit notes which are issued in the following financial years of the corresponding invoice. Also, the corresponding invoice shall not be taken into consideration for the purpose of determining the last date of claiming ITC on debit notes.

Illustration

This can be illustrated with the help of the following example:

Recent Advance Ruling:

The Hon’ble Gujarat Authority for Advance Ruling in the case of M/s I-TECH PLAST INDIA PVT. LTD. GUJ/GAAR/R/10/2021 has denied the claim of ITC on debit notes issued in FY 2020-21 which were towards the transaction of FY 2018-19, due to the following reasons:

1. The Gujarat AAR held that irrespective of the fact that wordings ‘invoice relating to such’ is connected to ‘debit note’, the fact remains that a debit note is always connected to the invoice. The omission of the ‘invoice relating to such’ does not mean that the relation of the debit note with the invoice has been cut off.
2. The intention of the government was not to disconnect the debit note from the original invoice so that the debit note gains an independent existence so as to entitle the applicant to claim Input Tax Credit in relation to CGST-SGST charged separately in debit notes issued by the supplier in following financial years.
3. The amendment does not imply that the year in which the debit note was issued will be considered as the ‘financial year’ for the purpose of amended Section 16(4). If a debit note is issued in a different financial year than that of the financial year in which the original invoice was issued, the financial year to which the debit note pertains will always be considered to be the year in which the original invoice was issued.
4. It was held that the financial year to which a debit note pertains, is invariably the financial year in which the original invoice (related to the said debit note) was issued.

Our comments:

The Budget 2020 Memorandum document itself states that the intent behind the amendment is ‘to delink the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing input tax credit’.

In the above backdrop, we are of the view that such an amendment has been provided for the purpose of availing input tax credit. Thus, the credit shall not be denied in such cases. Therefore, in our humble view, the ruling seems to be incorrect and ITC can be claimed on such debit notes.