Credit Notes, Debit Notes and Notes of Misunderstanding
CREDIT Notes and Debit Notes are simple accounting terms which any semi-literate accountant or businessman will easily understand, but somehow it is mostly misunderstood by brilliant Revenue officers and more brilliant lawyers and judges. In a judgement it was observed, "In the instant case, there was no such exchange of debit notes and credit notes. Of course, credit notes or cheques were issued by the assessee to their dealers. But the dealers did not reciprocate with debit notes. In this scenario, it cannot be held that the incidence of duty was actually passed on to the dealers."
In simple terms, a Credit note is issued to return any excess money to the other party, and a Debit Note is issued to collect extra money from the other party. In the context of refund applied by a manufacturer, the issue is whether issue of credit notes post clearance will pass through the test unjust enrichment.
The Model GST Law in Section 24 covers the Credit and Debit Notes as:
(1) Where a tax invoice has been issued for supply of any goods and/or services and the taxable value and/or tax charged in that tax invoice is found to exceed the taxable value and/or tax payable in respect of such supply, the taxable person, who has supplied such goods and/or services, may issue to the recipient a credit note ………
(2) Provided that no credit note shall be issued by the said person if the incidence of tax and interest on such supply has been passed by him to any other person.
(3) Where a tax invoice has been issued for supply of any goods and/or services and the taxable value and/or tax charged in that tax invoice is found to be less than the taxable value and/or tax payable in respect of such supply, the taxable person, who has supplied such goods and/or services, shall issue to the recipient a debit note …..
Section 24 (even the Section number matches) of the Jharkhand Value Added Tax Act 2005 and the VAT Acts of many States contain almost identical provisions.
So, the VAT authorities do understand what Credit Notes and Debit Notes are.