Avoid GST Credit Note — Make Commercial Credit Note – Advisory

Why businesses should prefer commercial credit notes over GST credit notes after the Sept 2025 GST circular

 

In the post‑sale discount era under GST, one of the most sensitive decisions for businesses is whether to issue a commercial (financial) credit note or a GST credit note under Section 34 of the CGST Act. The Central Board of Indirect Taxes and Customs (CBIC), through Circular No. 251/08/2025‑GST dated 12 September 2025, has clarified several long‑standing doubts around post‑sale discounts and credit notes, and this clarification has a direct impact on how suppliers and recipients should structure their documentation.​

Put simply, where businesses want to pass on discounts without disturbing the tax paid to the government and without triggering Input Tax Credit (ITC) reversals at the buyer’s end, commercial/financial credit notes are often the safer and more practical tool than GST credit notes. This article explains the background, the key clarifications in the circular, and why businesses should consciously move towards using commercial credit notes “as much as possible” and reserve GST credit notes only for clearly eligible cases.​

Background: post‑sale discounts and confusion under GST

Post‑sale or secondary discounts are discounts given after the original tax invoice has been issued, such as year‑end scheme discounts, volume rebates, and rate protection adjustments. Under the basic GST law, Section 15(3)(b) and Section 34 created confusion about whether such discounts must always be linked to the original invoice and whether GST must be adjusted via a credit note, with corresponding ITC reversal by the buyer.​

As a result, industry followed two very different practices. Some suppliers issued GST credit notes with GST component, reduced their output tax, and insisted that buyers reverse ITC; others issued pure commercial or financial credit notes without GST, leaving the original tax invoice and ITC intact. Different departmental interpretations and audit objections added to the uncertainty, particularly around whether recipients had to reverse ITC when they received post‑sale discounts without GST adjustments.​

Key clarifications in Circular No. 251/08/2025‑GST

Circular No. 251/08/2025‑GST, issued on 12 September 2025, addresses several of these disputes. Among the important points highlighted in various professional analyses are:​

• If the supplier issues a financial/commercial credit note without reducing the taxable value or GST on the original supply, the buyer is not required to reverse the ITC merely because of that post‑sale discount.​

• The government’s revenue is not impacted where the supplier does not claim any reduction of output tax, so ITC with the recipient can legitimately remain undisturbed.​

Commentaries on this circular from GST‑focused portals emphasize that, till the proposed amendments to Section 15(3)(b) and Section 34 are implemented, financial credit notes remain the preferred instrument for discounts that were not pre‑agreed in the original contract. Proposed changes discussed in the 56th GST Council meeting aim to formally allow post‑sale discounts via Section 34 credit notes where corresponding ITC is reversed, but until that is law, the circular’s guidance is the operative standard.​

Commercial vs GST credit notes: practical differences

For day‑to‑day business decisions, the distinction is more than just terminology. A commercial credit note is essentially a financial adjustment between parties, while a GST credit note under Section 34 is both a commercial and a tax adjustment tool.​

Key practical aspects drawn from professional commentary include:​

• A commercial credit note does not alter the taxable value or GST reported in GSTR‑1 or GSTR‑3B; the original invoice remains untouched in GST returns.

• A GST credit note reduces the taxable value and GST liability for the supplier (subject to conditions), but obliges the recipient to reverse proportionate ITC to maintain symmetry.

This means that a GST credit note is “costly” for the buyer in terms of ITC, and can trigger reconciliation issues, disputes, and audit queries if not handled precisely as per law. In contrast, commercial credit notes, when used correctly, allow both parties to settle commercial claims without disturbing GST already discharged and ITC already availed.​

Why businesses should prefer commercial credit notes

Given the clarifications in the September 2025 circular and the general direction of GST administration, there are several strong reasons for businesses to lean towards commercial credit notes wherever legally permissible.​

First, they preserve ITC at the recipient’s end in genuine post‑sale discount situations where the supplier does not seek reduction of output tax. This keeps dealers and distributors financially neutral on GST, making discount schemes more attractive and less contentious. Second, they reduce the risk of future disputes around ITC reversal, mismatches in GSTR‑2B and GSTR‑3B, and retrospective demands arising out of departmental audits.​

Third, commercial credit notes are operationally simpler for both accounting and compliance teams. There is no need for complex invoice‑wise ITC reversal by customers, and no need for suppliers to track lower taxable value and GST for each scheme‑related credit note in returns. This is particularly relevant for FMCG, automotive, pharma, and other sectors where high‑volume distributor schemes are routine.​

When GST credit notes should still be used

The message is not that GST credit notes should never be used, but that they should be used carefully and only when the legal conditions are clearly satisfied. Where discounts are pre‑agreed in the contract or invoice, and conditions of Section 15(3)(b) are fulfilled, the supplier may wish to reduce taxable value and GST via a Section 34 credit note, in which case proportionate ITC reversal by the recipient is expected.​

Professional summaries of the circular point out that the law is evolving and that the proposed amendments, once effective, will give a clearer statutory base for post‑sale discount credit notes with ITC reversal. Until then, for discounts not pre‑agreed or where ITC neutrality for the buyer is commercially important, financial or commercial credit notes remain the more conservative route.​

Action points for businesses

In light of the September 2025 circular and ongoing reforms, businesses should re‑examine their credit note policies. Some practical steps suggested by expert commentaries are:​

• Classify all discount schemes into pre‑agreed and post‑sale/conditional, and frame rules on when to use commercial versus GST credit notes.

• Update ERP and accounting workflows to default to commercial/financial credit notes for most post‑sale discounts where supplier does not seek GST reduction.

• Train sales, accounts, and tax teams on the distinction and on the ITC implications for trading partners.

By consciously preferring commercial credit notes and limiting GST credit notes to clear, legally supported situations, businesses can protect ITC, reduce litigation risk, and align with the spirit of the September 2025 clarifications.​

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Some links to other websites on this news and discussion topic

• Official GST (CBIC) circular PDF – Circular No. 251/08/2025‑GST dated 12‑09‑2025 (hosted copy of the circular):
  https://taxo.online/wp-content/uploads/2025/09/Cir251-13092025.pdf​

• Taxguru technical analysis – Example of a detailed post‑sale discount/credit note analysis :
  https://taxguru.in/goods-and-service-tax/cbic-circular-251-08-2025-clarifies-gst-treatment-post-sale-discounts.html  ​

• Article on post‑sale discounts/credit notes – Example:
  https://www.gstdost.com/live/blog-details/no-gst-reversal-on-post-sale-discounts-via-financial-credit-notes​

• Other CA firm commentary – :
  https://apmhconsulting.com/blogs/important-announcement-on-cbic-circular-no-251-08-2025-gst-ending-confusion-on-post-sale-discounts

more details on associate website : www.mlgassociates.in