A debit note under section 34(3) of the CGST Act is issued when the taxable value or tax on an invoice turns out to be less than it should have been. Typical cases:
- the rate was billed too low;
- quantity sent was more than invoiced;
- a price escalation clause applies after delivery, such as a copper price change on a pump order.
The seller pays the extra tax in the month the debit note is issued, and the buyer can claim credit on it.
The buyer's debit note
In everyday trade, buyers also issue their own debit notes to suppliers, for rejected goods, short receipt or quality claims. A pump maker that finds 30 of 500 castings faulty sends a debit note to the foundry. Under GST, the tax effect comes from the supplier's credit note, so the supplier should issue one in return.
Keeping track
Debit and credit notes are reported in GSTR-1 and change the party balance. A foundry supplying OEMs often receives rejection debit notes months after delivery, and these reduce what it expected to collect. Keeping them against the original invoice and lot shows the true margin per customer.