Reversal of ITC mandatory by recipient for supplier to claim reduction in GST liability on account of credit notes w.e.f. 1 October 2025
by Reina Legal | Oct 1, 2025
This is to inform you about an important change under the GST law, effective from 1 October 2025, regarding adjustment of tax liability through a tax credit note (‘tax CN’).
| Before Change |
After Change |
Action Required
(Effective from 1 Oct 2025) |
- As per section 34 of the CGST Act, a supplier can issue tax CN where:
1. Taxable value/tax charged in invoice exceeds what is payable,
2. Goods are returned by the recipient, or
3. Supplies are found to be deficient
- Earlier, upon issuance and declaration of such tax CN in GST returns, the supplier could reduce the output tax liability, except in case of post-sales discounts where ITC reversal by recipient is mandatory
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- A proviso to Section 34(2) is now being enforced. It restricts reduction of output tax liability for any tax CN (including post sale discounts) unless the following conditions are satisfied:
1. For registered recipients: The ITC availed against the original invoice must be reversed by the recipient
2. For unregistered or other cases: Where tax burden has been passed on, no reduction in liability will be allowed
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- The supplier must ensure that, for the purpose of reducing tax liability on account of tax CN, the recipient reverses the corresponding ITC (if claimed) in their respective GSTR-3B return
- It is advisable that, upon issuance of tax CN, the supplier should request a declaration from the recipient confirming that such ITC will be reversed through acceptance of tax CN in the Invoice Management System (‘IMS’) portal
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Practical challenges
- The GST law does not provide a clear mechanism to verify whether the recipient has reversed ITC
- Currently, verification is possible only through the IMS. In IMS:
- If the recipient accepts the tax CN, ITC is reversed in their GSTR-3B
- If rejected, the supplier’s tax liability increases, even in cases where the recipient had not claimed ITC on the original invoice. This is inconsistent with the new proviso and calls for changes in IMS system
- This amendment may lead to disputes, as suppliers will now need proof of ITC reversal by the recipient to claim reduction of tax liability on tax CN
- This change will create an additional compliance burden on businesses, as they will need to obtain declarations from recipients confirming reversal of ITC
