VAT Credit Notes and Debit Notes in Nepal

A Credit Note normally reduces the amount previously invoiced.

Common situations can include:

• goods returned by customer;

• post-sale discount;

• price reduction;

• cancellation;

• quantity correction;

• excess amount originally invoiced.

Example

Original taxable value: NPR 100,000

VAT: NPR 13,000

Customer returns goods worth: NPR 20,000

Credit Note: Taxable value reduction: NPR 20,000
VAT reduction: NPR 2,600

Revised net supply: NPR 80,000

Output VAT after adjustment: NPR 10,400 subject to the applicable VAT period and documentation rules.

A Debit Note normally increases the value previously invoiced.

Examples:

• original invoice understated price;

• additional quantity supplied;

• later contractual charge;

• upward price adjustment.

Example

Original taxable value: NPR 100,000

Additional taxable adjustment: NPR 10,000

Debit Note VAT: NPR 10,000 × 13%

= NPR 1,300

Additional amount including VAT: NPR 11,300

Rule 20 requires the Credit/Debit Note to contain information including:

• serial number;

• date;

• supplier's name;

• supplier address;

• supplier registration number;

• recipient's name;

• recipient address;

• recipient registration number where registered;

• original tax invoice number;

• original invoice date;

• description of goods/services;

• reason for adjustment;

• amount credited/debited;

• VAT amount credited/debited.

The note should make it unmistakably clear whether it is a: CREDIT NOTE or

DEBIT NOTE.

A Credit/Debit Note is an adjustment document.

It should therefore reference:

Original VAT Invoice No. + Original Invoice Date

Do not create an unrelated accounting voucher that cannot be traced back to the original taxable supply.

Rule 20 requires a registered taxpayer to maintain a monthly record of Credit and Debit Notes.

CMA recommends separate registers:

VAT Credit Note Register

and

VAT Debit Note Register

linked to:

• sales book;

• purchase book;

• VAT return;

• customer/supplier ledger.

Where a valid Credit Note reduces the supply: seller's Output VAT may be reduced according to the applicable return-adjustment rules.

Where a Debit Note increases the supply: seller's Output VAT increases.

Where a VAT-registered buyer previously claimed Input VAT:

Credit Note received

The buyer may need to reduce previously claimed Input VAT.

Debit Note received

The buyer may be able to claim the additional Input VAT where all eligibility requirements are satisfied.

Therefore seller and buyer records should agree.

A particularly poor VAT control is:

Delete old invoice → issue new invoice.

This can destroy:

• invoice sequence;

• audit trail;

• VAT-period history;

• customer records.

Instead: Original Invoice → Credit/Debit Note → Adjusted VAT reporting.

IRD continues to emphasise the legal obligation to issue and preserve invoices under Rule 17.

Example: Original sale:

NPR 500,000 + VAT NPR 65,000

Customer returns goods: NPR 100,000

Credit Note: Value: NPR 100,000
VAT: NPR 13,000

The seller should:

• record sales return;

• record Credit Note;

• reduce Output VAT where legally permitted;

• update inventory;

• link documentation.

The buyer should correspondingly adjust:

• purchase;

• Input VAT;

• payable.

A later discount may require a Credit Note where the taxable consideration is reduced.

Evidence should include:

• original agreement;

• discount policy;

• calculation;

• customer acceptance;

• original invoice;

• Credit Note.

Arbitrary year-end VAT reductions without commercial evidence can be challenged.

Where invoicing relates to convertible foreign currency, Rule 21 requires the invoice to use the Nepalese rupee equivalent based on the applicable Nepal Rastra Bank exchange rate on the transaction date.

A later Credit/Debit Note should maintain a defensible tax-value trail.

Original receivable: NPR 113,000

Credit Note: NPR 22,600

Taxable reduction: NPR 20,000

VAT reduction: NPR 2,600

Simplified seller entry:

Sales Return / Adjustment — Dr NPR 20,000
Output VAT — Dr NPR 2,600
Customer — Cr NPR 22,600

Actual chart of accounts may differ.

• Identify reason for adjustment

• Verify original invoice

• Credit or Debit Note?

• Assign sequential note number

• Include original invoice number/date

• Identify customer/supplier

• Record taxable-value adjustment

• calculate VAT adjustment

• Record reason

• Update sales/purchase register

• Update VAT return

• Update customer/supplier ledger

• Retain supporting evidence

• Do not delete original invoice

Deleting and recreating VAT invoices

Issuing adjustment without linking original invoice

Changing value without changing VAT

Seller adjusts Output VAT but buyer does not adjust Input VAT

Using journal voucher with no VAT Credit/Debit Note

Failing to retain monthly adjustment register

VAT adjustments should preserve the original tax invoice and create a complete, traceable audit trail from original supply to final adjusted consideration.