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Introduction: Major changes on Credit Notes and ITC Reversal Criteria under GST (W.E.F. 01.04.2025)
In a significant move toward tightening Input Tax Credit (ITC) regulations and ensuring transparency in GST compliance, the Finance Bill, 2025 has introduced a crucial amendment to Section 34(2) of the Central Goods and Services Tax Act, 2017 (CGST Act). Effective from 1st April 2025, this change directly impacts how suppliers can adjust their output tax liability through credit notes.In this article we understand the criteria and scenario for Credit Notes and ITC Reversal with explainations.
While the intention behind this amendment is to curb undue claims and increase discipline among recipients, it has created administrative and operational challenges for suppliers. This blog takes a comprehensive look at the implications of this amendment, supported by Circular No. 212/6/2024-GST dated 26.06.2024, and discusses compliant mechanisms under the law.
Legal Provision: Understanding Section 34(2) of the CGST Act
Prior to Amendment (Till 31.03.2025):
Under Section 34(2), suppliers could issue a credit note for a supply made earlier and reduce their output tax liability, provided the credit note was issued within the prescribed time limit, and the reduction was declared in the return for September following the end of the financial year or the date of filing the annual return, whichever is earlier.
Post Amendment (Effective from 01.04.2025):
The amended Section 34(2) restricts such reductions unless:
Conditions for Reducing Output Tax via Credit Note:
- The recipient has reversed the input tax credit (ITC) attributable to the credit note,
OR - The incidence of tax has been passed on to another party (i.e., credit note is not claimed by the recipient).
- The recipient has reversed the input tax credit (ITC) attributable to the credit note,
The burden of compliance and evidence now shifts to the supplier, who must ensure the recipient has not availed or has reversed the ITC.
Challenges for Suppliers: The Core Compliance Burden
The amendment brings clarity but also imposes significant obligations on suppliers, primarily due to the lack of a centralized verification system to confirm whether the recipient has indeed reversed the ITC.
Key Challenges:
1. Verification of ITC Reversal by Recipients
Suppliers must now independently confirm whether recipients have reversed ITC. The lack of a centralized system for real-time validation creates ambiguity, increasing the risk of non-compliance penalties.
2. Administrative Overhead
Tracking credit notes, reconciling reversals, and maintaining audit trails will demand robust internal processes. Manual errors or delays could trigger disputes during GST audits.
3. Reliance on Recipient Cooperation
Compliance hinges on recipients’ willingness to reverse ITC promptly. Disputes or delays could leave suppliers exposed to unexpected tax liabilities.
4. Other Consequences
- No automated government system currently enables the supplier to verify ITC reversal.
- Risk of interest and penalties if a supplier reduces output liability without proper verification.
- Delays in credit reconciliation, especially in B2B transactions involving large credit adjustments.
Compliance Strategies: Navigating Section 34(2)
To facilitate compliance and avoid penal consequences, two practical solutions have been recognized:
1. Self-Declaration by Recipient (Circular 212/6/2024-GST)
🔸 For Tax Amount > ₹5,00,000:
The supplier must obtain a certificate from the recipient’s Chartered Accountant (CA) or Cost Accountant (CMA) confirming that ITC reversal has been executed in respect of the credit note.🔹 For Tax Amount ≤ ₹5,00,000:
A simple self-declaration, undertaking, or certificate from the recipient is sufficient, wherein the recipient confirms ITC reversal. Note: “Tax amount” includes CGST + SGST/UGST + IGST + Compensation Cess, if any.2. IMS Portal (Information Management System) Confirmation
The IMS dashboard (used for return filing synchronisation) provides visibility to recipients about credit notes uploaded by the supplier in GSTR-1.
- If the recipient accepts the credit note on the IMS portal and it auto-populates in their GSTR-2B, it is assumed that the ITC is not claimed and reversal is accepted.
- If the recipient rejects the credit note, the supplier’s liability reopens in the next GSTR-3B, and tax must be paid accordingly.
Legal Illustration & Compliance Table
Scenario | Tax Involved | Require Action from Supplier | Proof Require |
Credit note issued, recipient reversed ITC | ≤ ₹5,00,000 | Obtain self-declaration from recipient | Signed undertaking |
Credit note issued, recipient reversed ITC | > ₹5,00,000 | Obtain CA/CMA certificate from recipient | Signed certificate from professional |
Credit note issued, ITC not claimed | Any amount | Confirm recipient accepted credit note on IMS portal | IMS dashboard status (Accepted) |
Credit note rejected by recipient | Any amount | Supplier must reverse credit note effect in next month’s return (GSTR-3B) | N/A |
Impact Analysis: Sector-wise Implications
🔹 MSMEs:
- Higher burden of collecting certificates.
- Limited professional support to ensure ITC tracking.
🔸 Large Corporates:
- Better systems in place but face volume-based risks.
- Need to automate document collection workflows.
🔹 Professionals (CAs, CMAs, Consultants):
- Increased role in issuing ITC reversal certificates.
- Opportunity to provide value-added compliance support.
Best Practices to Ensure Compliance for Credit Notes and ITC Reversal
- Maintain a records of declarations and certificates issued by recipients.
- Reconcile GSTR-1, 3B, and IMS portal monthly to avoid mismatch liabilities.
- Update contracts to mandate timely ITC reversals and disclosure requirements. Penalty clauses for non-cooperation can incentivize compliance.
- Avoid assuming ITC reversal without valid documentary evidence.
- If any doubt then do not adjust liability in GSTR-3B until confirmation is obtained.
- Deploy GST-compliant accounting software to automate credit note tracking, reconciliation, and deadline alerts.
Final Thoughts: A Call for New Compliance Regime
While the intention behind the amendment is to prevent misuse of ITC and credit notes — the burden on suppliers without a real-time tracking system is evident. The GSTN must consider introducing a dedicated module for ITC reversal acknowledgment, ideally integrated with GSTR-2B or GSTR-1A mechanisms.
Until then, documentary compliance, coordination with recipients, and proactive tax governance remain the only defenses against unintended GST liabilities.
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