A Complete Guide to Debit Notes in Malaysia

A Complete Guide to Debit Notes in Malaysia

In the intricate Malaysian business environment, understanding the implications of documentation in commercial transactions is more than simply a good business standard; it is the law. Although most businesses and companies are aware of what a credit note or invoice serves as a document, debit notes tend to be the documentation that is not understood as much by companies. So, what is a debit note? A debit note is a legal document that has a distinct purpose. It legally documents the increase in money owed by a buyer to a seller after an original invoice has been issued. Debit notes are subject to the oversight of the Inland Revenue Board of Malaysia (LHDN) and the Royal Malaysian Customs Department (JKDM). Debit notes are a source of legitimacy in respect to adjusting the accounting record and the tax upwards by law. 

This blog will discuss their proper usage, steps, content, and compliance in legislation in this article, so that you can ensure that your business is completely accurate in financial reporting and tax compliance.

Recent Amendments

The regulatory environment for financial documentation continues to evolve in Malaysia:

1. E-Invoicing Implementation: The phased implementation of mandatory e-invoicing significantly impacts debit note processing. All debit notes must now comply with technical specifications outlined in LHDN's guidelines, including mandatory fields and digital formatting requirements. Under LHDN e-invoicing rules, a validated e-Invoice receives a Unique Identifier (UUID), and adjustments after a 72-hour grace window must be made by issuing a debit/credit/refund e-Invoice that references the original invoice's UUID.  
2. SST Regulations Updates: Recent amendments to the Service Tax Act 2018 have clarified the treatment of debit notes for service tax purposes, particularly regarding the time of supply rules when supplementary charges are applied.  
3. Digital Record-Keeping: LHDN has enhanced requirements for digital maintenance of supporting documents, including debit notes, with a specific retention period of 7 years and accessibility requirements for audit purposes. Electronic copies are acceptable but must meet LHDN archiving requirements; offshore archiving has specific rules.

Businesses should regularly check the official LHDN and JKDM portals for the latest updates on documentation requirements.

What is a Debit Note?

A debit note is a commercial instrument issued by a supplier to a buyer that indicates an increase in the amount owed by the buyer. It serves as a formal notification that the original invoice amount requires upward adjustment due to specific circumstances.  

In practical terms, a debit note fulfills two essential functions:  

1. Accounting Function: It provides documentary evidence for increasing accounts receivable in the seller's books and accounts payable in the buyer's records.  
2. Tax Function: It serves as the legal basis for adjusting income tax calculations for the seller with LHDN and SST reporting for the seller with JKDM.  
3. Unlike credit notes, which reduce amounts owed, debit notes specifically increase financial obligations between trading partners.

Purpose and Legal Implications

Understanding the proper purpose of debit notes is essential for compliance:

Primary Purposes:  

1. Revenue Adjustment: To formally record additional charges that were not included in the original invoice.  
2. Tax Compliance: To provide an audit trail for increased output tax liability and corresponding input tax claims.  
3. Dispute Resolution: To officially document mutually accepted changes to original transaction values.  
4. Financial Accuracy: To record accounting entries that accurately depict the true value of transactions.

Legal Implications:

1. Debit notes are recognized as supporting documents under Malaysian tax law  
2. They provide a legal basis for adjusting tax calculations in compliance with LHDN requirements  
3. Properly issued debit notes create enforceable payment obligations. They serve as crucial evidence during tax audits and disputes

When to Issue a Debit Note?

Debit notes should be issued in specific circumstances:

Common Scenarios:  

1. Undercharging in Original Invoice: When the original invoice was defective and resulted in underbilling  
2. Extra Charges: When additional charges are discovered after the original invoice was issued (for example, delivery charges, storage fees)  
3. Price Adjustments: When the terms of the contract permit price adjustments after the initial billing  
4. Quantity Discrepancies: When actual quantities supplied exceed the originally invoiced amounts  
5. Scope Changes: When additional work or products are provided beyond the original agreement

Example: A contractor issues an invoice for construction work, then discovers additional foundation work was required but not included in the original pricing. A debit note would be appropriate to bill this additional work.

Essential Contents of a Valid Debit Note

While there is no statutory form, LHDN requires debit notes to contain specific information:

Mandatory Elements:

• Clear heading “DEBIT NOTE”  
• Unique serial number  
• Date of issue  
• Supplier's name, address, and tax identification number  
• Customer's name and address  
• Reference to original invoice number and date  
• Detailed description of the adjustment  
• Quantity and amount of additional charges  
• Applicable tax rate and amount  
• Total amount payable  
• Authorized signature and company stamp

E-Invoicing Requirements:

For businesses under the e-invoicing regime, additional technical specifications apply, including mandatory QR codes and specific data fields as outlined in LHDN's technical specifications. Debit notes must meet the LHDN e-Invoice schema and reference the original e-Invoice UUID.

Compliance Process and Timing

Proper handling of debit notes follows a structured process:

Step-by-Step Compliance:

1. Identify Need for Adjustment: Determine that circumstances warrant upward adjustment of the original invoice  
2. Prepare Debit Note: Create a document containing all mandatory elements  
3. Issue to Customer: Transmit debit note through appropriate channels (electronically for e-invoicing businesses)  
4. Update Accounting Records:

• Seller: Debit accounts receivable, credit revenue account, record additional output tax  
• Buyer: Debit expense account, credit accounts payable, record additional input tax  
• Adjust Tax Returns: Include additional amounts in relevant tax periods  
• Keep Records: Retain debit notes for the retention period of 7 years.  
• Timing Considerations:
• Issue promptly upon discovery of the need for adjustment; for e-invoicing, changes after the 72-hour window require a debit note  
• Include in the accounting records of the period when issued  
• Adjust tax calculations for the period of issuance  
• For SST purposes, the time of supply rules apply to the adjustment

Debit Notes vs. Credit Notes: Key Differences

Understanding the distinction is crucial for proper application:

Feature	Debit Note	Credit Note
Purpose	Increases the amount payable	Reduces the amount payable
Accounting Effect	Increases accounts receivable	Decreases accounts receivable
Tax Impact	Increases output tax liability	Decreases output tax liability
Trigger Events	Undercharging, additional services	Returns, discounts, and overcharging
Buyer's Action	Records additional liability	Records reduction in liability

Tax Treatment and Implications

Debit notes have significant tax consequences:

For the Seller/Supplier:  

• Increases gross income for income tax purposes with LHDN.  
• Increases output tax liability for SST purposes with JKDM.  
• Must be declared in tax returns for the period issued  
• Creates an audit trail for revenue adjustments

For the Buyer/Customer:  

• Increases deductible expenses for income tax purposes  
• Increases input tax claim for SST purposes  
• Must be supported by proper documentation for tax deduction  
• Requires verification of validity before claiming input tax

Most significantly, the buyer's accounting treatment involves increasing expenses/accounts payable, and any SST adjustments must be reflected in the supplier's SST return.

Penalties for Non-Compliance

Debit notes mishandled will result in severe consequences:

• Disallowed Deductions: Expense claims based on invalid debit notes may be disallowed  
• Tax Penalties: Penalties can be severe—fines, monetary penalties up to multiples of tax undercharged, and criminal sanctions are possible under the ITA; see LHDN/ITA for specifics.  
• Audit Issues: Poor documentation can trigger extensive audits and investigations  
• Loss of Credibility: Repeated compliance issues damage business reputation with LHDN

FAQs

1. Is a debit note mandatory for all price adjustments?

While not legally mandatory for all situations, debit notes are strongly recommended for any upward adjustment to maintain proper audit trails and ensure tax compliance.

2. Can a buyer refuse to accept a debit note?

A buyer may protest a debit note if he believes the additional charges are unlawful. But if the debit note is authentic and sent in the proper way, refusal to pay may lead to commercial disputes.

3.  How long should businesses keep debit note records? 

The standard retention period is 7 years from the end of the relevant assessment year, as required under Malaysian tax law. Electronic copies must meet LHDN archiving requirements.

4. Are there specific rules for debit notes under e-invoicing?

Yes, businesses subject to e-invoicing must generate debit notes in the specified digital format with mandatory data fields and QR codes as per LHDN requirements, referencing the original e-Invoice UUID.

5. Can a debit note be issued for partial payments?

No, debit notes are for additional charges only. Partial payments should be handled through normal accounting processes without debit notes.

Conclusion

Debit notes are critical for keeping accurate financial record-keeping and tax compliance for businesses that do business in Malaysia. Debit notes are the legal basis for entering upward adjustments to transaction values, particularly for sellers and buyers to maintain accurate books and be in compliance with tax. Prejudicial use of debit notes can expose businesses to disputes with tax authorities, serious adverse tax consequences for reporting tax forms that are not accurate, and fracture the audit trail. As the country moves closer to full digitalization of tax documentation with e-invoicing, being able to properly understand and execute debit note procedures will be integral to business compliance overall.

You can explore Flick's other global tax and compliance resources here.