New GST Rule on Credit Notes

 New GST Rule on Credit Notes – Effective 1st October 2025

The Finance Act (No. 7) 2025 ( Section 126 ), read with Notification No. 16/2025–CT, has introduced compliance for businesses issuing credit notes under GST. What Changes? Until 30th September 2025 – Suppliers can reduce their output tax liability on issuing a credit note (subject to customer declaration in case of post-sale discounts). From 1st October 2025 – Supplier will be permitted to reduce their output tax liability only if the registered recipient has reversed the corresponding ITC, if availed. Applicability Applies only to credit notes issued on/after 1st October 2025. Past credit notes (before this date) remain under the old framework, except post-sale discounts, where recipient’s ITC reversal declaration is still mandatory. The new compliance mechanism means Credit Notes flow from supplier's GSTR-1 to the customer's Invoice Management System (IMS) for acceptance. It can be proof of the ITC reversal by the recipient. However, GST authorities may not accept it as conclusive legal proof of the actual ITC reversal in the recipient’s GSTR-3B and books, paving the way for litigation against the supplier. To secure supplier position against future litigation, supplier may adopt documentary evidence: Mandatory Declaration: Update your standard operating procedures (SOPs) to obtain a formal Declaration/Undertaking from the customer's authorized signatory. This document should explicitly confirm that the ITC attributable to the Credit Note has been duly reversed in their books and will be reflected in their corresponding GSTR-3B. CA/CMA Certification: For high-value transactions, consider making it a mandatory practice to obtain a Certificate from the Recipient’s CA/CMA confirming the reversal. The time to update your sales contracts, commercial terms, and internal reconciliation processes is NOW.