(A) Clause 121 of the recently announced Finance Bill, 2025 has introduced a significant change for suppliers under the GST. Suppliers can now only reduce their tax liability by issuing a credit note if
1. The recipient has reversed the Input Tax Credit (ITC) related to the supply, or
2. The incidence of tax on such supply has been passed on to another person.
Screenshot of the Clause 121 of the Finance Bill, 2025 is attached below for reference:
(B) Section 34(1) of the CGST Act, 2017
Let us first understand the concept of credit note:
In layman language, credit notes under GST are issued by the suppliers to reduce their tax liability with respect to supply of goods/services in the below-mentioned scenarios:
(a) Taxable value or tax paid as per the invoice exceeds the actual taxable value or tax payable;
(b) Goods are returned by the recipient;
(c) Goods or services rendered are found to be deficient.
The above meaning of Credit note has been stated in Sub-Section (1) of Section 34 of the CGST Act, 2017. Extract of the same is reproduced below for reference:
"34(1): Where one or more tax invoices have] been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the Registered person, who has supplied such goods or services or both, may issue to the recipient one or more Credit notes for supplies made in a financial year containing such particulars as may be prescribed."
(C) Section 34(2) of the CGST Act, 2017
As mentioned in clause 121 of the finance bill, 2025 the amendment is proposed in sub-section (2) of Section 34 of the CGST Act, 2017. Let us have a look at the sub-section (2) of Section 34 of the CGST Act, 2017:
Any Registered person who issues a Credit note in relation to a supply of goods or services or both shall declare the details of such Credit note in the return for the month during which such Credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:
Provided that no reduction in Output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.
(a) Analysis of the pre-amendment sub-section (2) of Section 34 of the CGST Act, 2017:
It is clearly evident that the proviso under this section prohibited the reduction in output tax liability if the tax and interest on the supply had been passed on to another person.
However, there was no requirement for the recipient to reverse their ITC for the supplier to reduce their tax liability. This earlier provision meant that suppliers could reduce their tax liability even if the recipient had not reversed their ITC, potentially leading to a loss of government revenue. It seems that the above mentioned amendment is introduced to address this concern.
(D) Comparative analysis of post amendment Section 34(2) with sub-clause (ii) of clause (b) of Section 15(3) of the CGST Act, 2017:
Section 15 of the CGST Act, 2017 has elucidated the provisions pertaining to computation of value of supply under GST and this includes the categories to be included and excluded while computing value of supply under GST on which tax shall be charged.
Sub-clause (ii) of clause (b) of Section 15(3) of the CGST Act, 2017 is reproduced below for reference:
"(3) The value of the supply shall not include any discount which is given:
(a) .....
(b) after the supply has been effected, if-
(i) …….
(ii) Input tax credit as is attributable to the discount on the basis of documents issued by the supplier has been reversed by the recipient of the supply.
Thus, the above elucidated sub-clause of Section 15(3) of the CGST Act, 2017 makes it clear that value of supply shall not include any discount which is provided after the supply if the ITC proportioned to such discount has been reversed by the recipient of such goods/services.
Hence, it can be inferred from the reading of above sub-section of Section 15 that the condition of ITC reversal by the recipient existed only in case of discounts [given by issuance of credit notes] which are given after the supply is affected.
With the proposed amendment in sub-section (2) of Section 34 of the CGST Act, 2017, the Government has now widened the scope of condition of ITC reversal by the recipient with respect to the credit note issued by the supplier.
(E) Author's View on the said amendment
The key challenge now for suppliers after the amendment will be determining whether the recipient has indeed reversed the ITC:
- One way to address this could be to obtain a self-declaration from the recipient regarding the reversal of ITC.
- Alternatively, suppliers may rely on the Information Management System (IMS) of the GST portal, which will show whether the recipient has accepted or rejected the credit note. If rejected, the supplier's tax liability will automatically increase in the following month.
However, the author is of the view that even after application of IMS in the given case scenario, the issue of determination of ITC reversal by the recipient would arise at the end of the supplier.
Even if the credit note is accepted by the recipient, the supplier may still be unaware of whether the ITC has been reversed. Hence, it is advisable that a self-declaration may be obtained from the recipient irrespective of the action with respect to such credit note by the recipient in its IMS dashboard.
(F) Reliance can be placed upon by the supplier on the Circular 212/6/2024-GST dated 26th June, 2024 which was issued by CBIC to render clarification upon Mechanism for providing evidence of compliance of conditions of Section 15(3) (b) (ii) of the CGST Act, 2017 by the suppliers:
Relevant extract of the said circular is reproduced below for reference
2.4 In view of the above, till the time a functionality/ facility is made available on the common portal to enable the suppliers as well as the tax officers to verify whether the input tax credit attributable to such discounts offered through tax credit notes has been reversed by the recipient or not, the supplier may procure a certificate from the recipient of supply, issued by the Chartered Accountant (CA) or the Cost Accountant (CMA), certifying that the recipient has made the required proportionate reversal of input tax credit at his end in respect of such credit note issued by the supplier.
2.5 The said CA/CMA certificate may include details such as the details of the credit notes, the details of the relevant invoice number against which the said credit note has been issued, the amount of ITC reversal in respect of each of the said credit notes along with the details of the FORM GST DRC-03/ return / any other relevant document through which such reversal of ITC has been made by the recipient.
2.6 …..
2.7 In cases, where the amount of tax (CGST+SGST+IGST and including compensation cess, if any) involved in the discount given by the supplier to a recipient through tax credit notes in a Financial Year is not exceeding Rs 5,00,000 (rupees five lakhs only), then instead of CA/CMA certificate, the said supplier may procure an undertaking/ certificate from the said recipient that the said input tax credit attributable to such discount has been reversed by him, along with the details mentioned in Para 2.5 above.
The said Circular was issued by CBIC to help provide clarification as no facility available to the supplier as well as the tax officers on the common portal to verify whether the input tax credit attributable to the said discount has been reversed by the recipient or not.
Applicability of the clarification rendered by Circular No. 212/6/2024-GST Dated 26th June, 2024 in the proposed amendment of sub-section (2) of Section 34 of the CGST Act, 2017:
(A) Amount of tax involved by issuance of credit note is more than ₹ 5,00,000: The supplier may procure a certificate from the recipient of such goods / services, issued by a CA / CMA , thereby certifying that the ITC attributable to the said credit note has been reversed by the recipient;
(B) Amount of tax involved by issuance of credit note is less than ₹ 5,00,000: The supplier may procure an self - declaration / undertaking/ certificate from the said recipient that the said input tax credit attributable to such credit note has been reversed by him.
(G) Conclusion
While this amendment aims to plug potential revenue losses to the government, it could impose additional administrative burdens on suppliers. The reliance on self-declarations from recipients, coupled with the uncertainty around whether ITC has been reversed, may add complexity to the process. As a result, suppliers may find themselves grappling with more compliance requirements, potentially affecting the ease of business.
It may inadvertently create more challenges for suppliers, increasing their administrative workload.
What are your thoughts on the recent changes to the credit note rules under GST? Do you think the new requirement for ITC reversal will make compliance more challenging for suppliers? Share your views in the comments below!
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