Based on recommendations of 56th GST Council Meeting held on 3-9-2025.

Credit Note is an instrument through which amount payable by the recipient of the supply can be reduced. Credit Note can be issued in various situations like sales returns, where excess amount has been charged, where goods sent are damaged or defective or issue in quality, short quantity, post-sale offers, incentives, price revision, etc. Here, goods can either be returned (sales return) or even the supplier at his discretion can allow the goods to be retained by the recipient itself by offering him a discount in price. Credit Notes can be generally of two types, one is GST Credit Note by issuance of which GST paid on original supply can be reduced and another is Commercial Credit Note by issuance of which no GST can be reduced which has been paid at the time of original supply.

However, from the perspective of GST, since credit notes can have an impact on the reduction of GST earlier deposited with the Government by the suppliers, therefore, there are certain restrictions placed in the law to avoid any misuse of the said provisions of the law by reducing the GST liability in section 15(3)(b) and section 34 of the GST law. Section 15(3)(b) allows reduction in GST liability only when post-sale discount in the price is agreed before or at the time of original supply. Therefore, any reduction in price on account of any reasons like offering of incentives, post-sale discount, price negotiation, sale return beyond timelines, etc. or whatsoever, without an agreement beforehand, will not have an effect of reduction in GST liability. For this purpose, only the Commercial Credit Note can be issued.

Similarly, section 34 allows three situations where Credit Notes can be issued (i) where excess taxable value or GST has been charged (ii) sales return and (iii) goods/services are deficient. Further, credit notes issued needs to be reported in GSTR 1 & 3B within 30th November of the subsequent FY in which the supply was made and then only GST liability can be adjusted. If credit note is issued in accordance with section 34, then GST liability can be reduced but if does not fulfil the said criteria then supplier can issue Commercial Credit Note.

It can be observed that few of the situations in which the Commercial Credit Notes are generally issued can be where the sales return is happening beyond 30th November subsequent to the FY in which the original supply was made, where credit notes on account of reasons specified in section 34 are being issued beyond the specified date, where post-sale discount (on account of any reasons as stated above) is given without an agreement on the date of original supply. So, ideally it seems that in cases where commercial credit notes are issued, it does not qualify for a service from the recipient to supplier especially in the absence of any express or implied contract of any service in action from the recipient to supplier.

So, what plays important is the contract between the parties and the condition in such a situation shouldn’t amount to consideration. However, a caution needs to be made that there can be certain transactions where service elements are involved for which commercial credit notes are issued as a mode of consideration. Hence, GST Council cannot ideally provide a clear carve-out in the law that a mere credit note adjustment does not constitute a service but certainly a clarification can be issued illustrating the situations in which commercial credit notes can be considered a service from the distributor and situations in which it cannot be treated as a service from the distributor.

In this regard, 56th GST Council Meeting has recommended to issue clarification in respect of following issues:

·       ITC reversal was being sought on post-sale discount through financial/commercial credit notes.

·       Levy of GST in respect of post-sale discount provided by the manufacturer to the dealer as additional consideration in the transaction between dealer and end-consumer.

·       Levy of GST in respect of post-sale discount as consideration in lieu of promotional activities, etc. performed by the dealer.

Besides the anomaly which existed between section 15(3)(b) and section 34 will be put to rest by removing section 15(3)(b)(i) which commands for establishing the discount in terms of an agreement before or at the time of supply and specifically linking of the same with the relevant invoices. The reason is because currently even if one is not able to satisfy the criteria under section 15(3)(b)(i), still section 34 already covers all such scenarios under the three broad options available yet section 15(3)(b)(i) was a bottle neck. Section 15 deals with the valuation and the reduction in value is allowed in accordance with its sub-section (3) only, but the situations and the manner under which such value can be reduced is given under section 34 which deals with issuance of credit notes. Discount is anything which has an effect of reduction in the value of the supply which can be on account of plethora of reasons as stated above which already seems to get covered under scenarios specified in section 34, therefore, the condition as stipulated under section 15(3)(b)(i) was restricting the reduction in value under the provisions of section 15(3)(b)(i) and hence, in such scenarios Commercial Credit Note was the only option. In light of the same, section 15(3)(b) is recommended to be amended to provide that discount should be granted through GST credit note issued under section 34 (please note section 34 does not have any such requirement of establishing the post-sale discount before or at the time of supply) and to amend section 34 to include a reference to section 15(3)(b), so as to provide reversal of ITC by the recipient in case where a post-sale discount is given and value of supply is reduced through GST Credit Note. Post amendment, suppliers could issue GST credit notes for any post-sale discount, regardless of prior agreement, and reduce their output GST liability by issuing GST credit note. Spontaneous or ad-hoc discounts (such as returns, negotiations, or commercial adjustments) would become eligible for GST reduction. Businesses could tailor discounts flexibly based on market demand and business relationships after supply, simplifying commercial negotiations and settlement processes. Still point to be noted is that the law nowhere mandates to reduce the GST liability, hence, if one wants to go ahead with Commercial Credit Notes, it may not be a bar and especially in light of the recommendation that clarification would be issued regarding non-reversal of ITC on account of post-sale discount through financial/commercial credit note. However, removing the agreement requirement may encourage artificial price reductions post-supply solely to lower GST liability, risking revenue leakage and possible tax evasion.

Earlier in the absence of IMS, in the year 2022, CBIC issued a Circular No. 212/6/2024-GST dated 26-6-2025 to get certificate/CA certificate of ITC reversal from the recipients on retrospective basis which was a real pain point for the industry.

The circulars are yet to be issued and upon issuance of the same, we will be able to read through the fine prints of the same and better able to gauge into the nuances of the same. Stay tuned! Thanks for reading. In case of any clarifications, please feel free to connect with us.