In business transactions, errors in invoicing can occur due to incorrect prices, quantity discrepancies, or tax calculation errors. Under the Goods and Services Tax (GST) regime in India, there are special documents that businesses can use to correct such errors and ensure compliance with tax law. The debit note and credit note are two of the adjustment tools that have been implemented to maintain transparency and accuracy in financial records.
A debit note is issued when the invoice amount needs to be increased, while a credit note is issued when it needs to be decreased. A revised invoice replaces the original one when major corrections are required. This article covers what a debit note, credit note, and revised invoice are, their purpose, the main differences, their use, recording them in the accounting systems, making GST returns, and common errors to be avoided.
Key Takeaways
-
Debit notes, credit notes, and revised invoices are corrective documents used under GST to fix errors in original invoices and ensure accurate financial records.
-
A seller issues a debit note to increase the invoice value and tax liability, typically when the buyer was undercharged or for additional costs.
-
A seller issues a credit note to decrease the invoice value and tax liability, usually due to goods returns, post-sale discounts, or overcharging.
What Is A Debit Note?
A debit note is a commercial document drafted by a seller to a buyer, which shows an increase in the amount payable. Under Section 34 of the CGST Act, 2017, a debit note should be issued when the taxable value billed in the tax invoice is less than the actual taxable value of the supply or when the tax paid is less than the tax payable.
Common scenarios that require a debit note may include:
-
Additional charges that are found after the invoice has been issued (freight, packaging, or handling charges)
-
Undercharging of goods or services due to calculation of mistakes or changes in the rate of taxation that applies to the supply.
Businesses must issue debit notes electronically via the Invoice Registration Portal (IRP) if their aggregate turnover exceeds ₹5 crore.
What Is A Credit Note?
A credit note is a document issued by a seller to a buyer, showing a reduction in the amount payable. Under Section 34 of the CGST Act, 2017, a credit note is to be issued where the taxable value or tax charged in the tax invoice exceeds the actual value or tax payable, or the goods supplied are returned, or services provided are deficient.
Examples of credit notes include goods returned because of damage or defects, discounts provided to the buyer after the invoice has been issued, accounts receivable, including instances where the seller has overcharged the buyer, or retrospective tax rate reductions after the issuance of the invoice.
From April 2025, credit notes for e-invoicing entities must also be uploaded to the IRP within 30 days of issuance to remain valid for GST reporting.
What Is A Revised Invoice?
A revised invoice is a modified invoice that is issued when there are errors in the important details on the original invoice. Unlike debit or credit notes, which change the value of particular items, a revised invoice is a replacement for the entire original invoice.
Revised invoice corrections typically involve errors such as incorrect party details (GSTIN or address), incorrect HSN/SAC codes or tax rates, or calculation errors, which must be updated for multiple line items.
Under GST, revised invoices must clearly reference the original invoice number and date. The earlier invoice must be marked “cancelled” or “superseded” for audit transparency.
Key Differences Between Debit Note And Credit Note
Understanding the difference between debit note and credit note is extremely crucial for proper accounting and GST compliance. While both documents are used to adjust the value of invoices, they serve different purposes and have distinct impacts.
To clearly understand how a debit note differs from a credit note, here’s a side-by-side comparison.
|
Aspect |
Debit Note |
Credit Note |
|
Issued By |
Buyer to Seller |
Seller to buyer |
|
Purpose |
Increase invoice value |
Decrease invoice value |
|
When Issued |
Undercharging, additional costs |
Overcharging, goods return, discounts |
|
Effect on Seller |
Increases receivables |
Decreases receivables |
|
Effect on Buyer |
Increases payables |
Decreases payables |
|
GST Impact |
Increases tax liability |
Decreases tax liability |
When And Why Are These Documents Used?
The debit note and credit note serve specific purposes in business dealings, issued under defined circumstances to ensure financial accuracy and GST compliance.
When Debit Notes Are Used
When the initial invoice understates the taxable value or GST amount, a debit notice is issued. This kind of situation could occur in cases like:
-
Cost additions: Discovered after the invoice has been sent, such as freight, packing, insurance, or installation fees.
-
Errors with underbilling: When products or services are billed for less than what was agreed upon.
-
Revised tax rates: When the GST Council raises the tax rates on certain items or services.
-
Changes in quantity or quality: When more products or services are delivered after the initial invoice date.
A debit note guarantees that the buyer can claim a proportionate ITC on the excess tax paid and that the seller's output tax liability is appropriately enhanced.
When Credit Notes Are Used
When the seller must lower the invoice value or tax amount because of an additional adjustment to the transaction, a credit note is issued. Examples of common cases are:
-
Returns of products because they are damaged, expired, or don't meet the requirements.
-
Incentives or post-sale discounts are disclosed following the issue of the invoice.
-
Overcharging or faults in duplicate billing caused the taxable value to increase.
-
Notices that reduce the GST on a certain goods category retroactively.
By ensuring that the buyer reverses excess ITC and lowering the seller's production tax burden, credit notes assist in preserving symmetry in both parties' tax reporting.
When To Issue A Revised Invoice
When the original invoice had inaccurate or missing information that compromised the invoice's legitimacy, a revised invoice is used. Among these errors are:
-
Incorrect GSTIN or address of the buyer or seller.
-
Wrong HSN/SAC code or tax rate applied to items.
-
Misstated supply value or place of supply, which can affect the applicable GST type (CGST/SGST or IGST).
-
Clerical errors detected during audits or reconciliation that require re-issuance of the entire invoice rather than partial correction.
Revised invoices are particularly relevant for businesses that transitioned to e-invoicing after April 2025, as the GST Network now mandates that any correction to an already registered invoice be made by issuing a revised version through the Invoice Registration Portal (IRP).
These documents help keep the books right, ensure proper GST compliance, adjust the effective GST liability and ITC, ensure transparency in the relationship with businesses, and provide an audit trail for regulatory compliance.
Also, learn What is HSN code in GST here.
How to Record Debit and Credit Notes in Accounting Systems? [H2]
Proper recording of debit notes and credit notes in the accounting systems is necessary for appropriate bookkeeping. The accounting treatment is based on whether an entity is the issuer or the recipient.
-
Recording Debit Notes (Seller's Books)
Debit Accounts Receivable (Increase in amount due from buyer), Credit Sales Accounts (Increase in revenue), Credit GST Output Account (Increase in tax liability). This could be easily understood as:
|
Particulars |
Effect |
|
Accounts Receivable A/c |
Dr. |
|
To Sales A/c |
|
|
To GST Output A/c |
|
|
(Being additional amount receivable recorded, including GST) |
|
-
Recording Debit Notes (Buyer's Books)
Debit Purchases Account (Increase of cost), Debit GST Input Account (Increase of ITC Available), Credit Accounts Payable (Increase of amount owed to Seller). This could be easily understood as:
|
Particulars |
Effect |
|
Purchases A/c |
Dr. |
|
GST Input A/c |
Dr. |
|
To Accounts Payable A/c |
|
|
(Being additional liability recorded including ITC on GST) |
|
-
Recording Credit Notes (Seller's Books)
Credit Sales Returns, Debit GST Output (Reduction of tax liability), Credit Accounts Receivable, ( decrease in amount due from buyer). This could be easily understood as:
|
Particulars |
Effect |
|
Sales Returns A/c |
Dr. |
|
GST Output A/c |
Dr. |
|
To Accounts Receivable A/c |
|
|
(Being reduction in receivable and GST liability recorded) |
|
-
Recording Credit Notes (Buyer's Books)
Debit Accounts Payable (Deduction in Amount Due), Credit Purchase Returns Account, Credit GST Input Account (Deduction in ITC Claimed). This could be easily understood as:
|
Particulars |
Effect |
|
Accounts Payable A/c |
Dr. |
|
To Purchase Returns A/c |
|
|
To GST Input A/c |
|
|
(Being reduction in liability and reversal of ITC recorded) |
|
Reporting Debit And Credit Notes Under GST
Under GST, the debit note and credit note need to be reported in the appropriate GST returns to ensure proper tax computation and ITC reconciliation.
-
Reporting in GSTR-1: The suppliers need to file all the debit notes and credit notes issued in a tax period in Form GSTR-1. For B2B supplies, information must be reported in Table 9B containing the original invoice number and date, debit/credit note number and date, revised taxable value, and revised tax amounts.
-
Period of Reporting: As per Section 34 of the CGST Act, debit and credit notes have to be raised and reported in GSTR-1 in the financial year in which the supply was made or by 30th November of the following financial year, whichever is earlier.
-
Impact on GSTR-3 B: The values from debit and credit notes reported in GSTR-1 flow automatically to GSTR-3 B. Debit notes raise the output tax liability, and credit notes lower the output tax liability. Buyers must accept the details in their GSTR-2B to amend their ITC accordingly.
-
E-Invoicing Requirements: For businesses with turnover exceeding ₹5 crore (as per April 2025 regulations), debit and credit notes are to be made through the e-invoicing system. Each note will have to be uploaded to the Invoice Registration Portal (IRP) within 30 days.
Common Mistakes To Avoid
Businesses tend to make common mistakes when issuing debit note and credit notes, which may result in compliance violations and fines:
-
Issuing Note Without Reference To Original Invoice: Always mention the original invoice number and date to create a reference to it
-
Incorrect GST Calculations: Ensure the GST rate matches the rate applied to the original supply.
-
Missing Mandatory Details: Include all the mandatory fields like GSTIN serial number, HSN/SAC code and tax amount
-
Exceeding Time Limits: Issue notes within prescribed time limits, to avoid non-acceptance and penalties
-
Not reporting in GSTR-1: Failure of Report leads to Mismatch of Returns between Suppliers & Recipients
-
Failing to upload to IRP (for eligible taxpayers): This may invalidate the note under GST rules.
-
Not maintaining documentary trail: Businesses should archive issued notes digitally for 6 years as per the GST (Record Keeping) Rules 2024.
Conclusion
Understanding the debit note and credit note mechanism is vital for accurate financial reporting under GST. These tools ensure that any change in invoice value is properly documented and reflected in returns.
Timely issuance, digital reporting, and accurate classification of such documents protect businesses from penalties and audit discrepancies. Companies must adhere to prescribed formats, time limits, and reporting requirements to avoid penalties and ensure GST compliance.
