Credit Notes Now Need Your Customer’s Action Before Your GST Goes Down
From 1 October 2025, a credit note to a registered buyer reduces the seller's GST only after the buyer reverses the matching input tax credit through IMS, or if the tax was never passed on. Credit notes for FY 2025-26 supplies must be issued by 30 November 2026. B2C credit notes are not affected.
A customer returns goods or you give a discount after the sale. You issue a credit note, report it in GSTR-1 and expect your tax to go down. Since 1 October 2025, that depends on your customer.
What changed
The Finance Act, 2025 amended Section 34(2) of the CGST Act, and Notification 16/2025-Central Tax brought the change into force on 1 October 2025. A supplier can now reduce output tax through a credit note issued to a registered buyer only if the buyer has reversed the matching input tax credit, or if the tax was not passed on to the buyer.
The check happens in the Invoice Management System (IMS). The buyer accepts the credit note and reverses the credit, or rejects it, or keeps it pending for one tax period.
How it works
| Buyer's action in IMS | Effect on the seller's tax |
|---|---|
| Accepts and reverses the credit | Seller's tax goes down by the credit note amount |
| Accepts but declares a lower credit to reduce (for example, never claimed the credit) | Seller's tax goes down; the buyer reverses only what they actually claimed |
| Rejects | Seller's tax does not go down |
| Keeps it pending (one month or one quarter only) | Seller's tax waits until the buyer decides |
Credit notes to unregistered buyers (B2C) are not affected. There is no credit for the buyer to reverse.
The deadline for issuing credit notes
A credit note for a supply in a financial year has to be reported by 30 November after that year, or the date you file the annual return if that is earlier. For supplies in FY 2025-26, that is 30 November 2026. After that the credit note does not reduce your tax at all.
A worked example
A Ludhiana hosiery maker sold ₹10,00,000 of goods (₹50,000 GST at 5%) to a Delhi retailer in June 2026. In September the retailer returned ₹2,00,000 of stock. The maker issued a credit note for ₹2,00,000 plus ₹10,000 GST.
- ✓The retailer accepts it in IMS and reverses ₹10,000 of credit. The maker's tax falls by ₹10,000.
- ✓If the retailer rejects it, the maker keeps paying the ₹10,000 and has to settle the dispute commercially.
What sellers should do
- ✓Agree credit notes before you issue them. Send the buyer a draft and get it confirmed.
- ✓Issue them promptly and report them in GSTR-1 for the month you issue them.
- ✓Check IMS each month for rejected or pending credit notes.
- ✓Keep the paperwork: return notes, discount agreements and emails.
What buyers should do
- ✓Act on credit notes in IMS. A pending credit note can stay pending for one period only.
- ✓Declare the right amount. If you never claimed credit on the original invoice, say so rather than reversing tax you never took.
- ✓Do not reject a credit note you agree with. Your supplier will keep paying tax and will ask you to sort it out.
Frequently asked questions
What if my buyer is slow to act?
Your reduction waits. Agree a time frame in your contract, and follow up before you file each GSTR-3B.
Does this apply to financial or commercial credit notes without GST?
No. A commercial credit note that does not reduce GST is outside Section 34 and is not reported as a GST credit note.
Is the deadline the same for debit notes?
No. A debit note has no Section 34 deadline for the seller. The buyer's deadline to claim credit on it depends on the year of the debit note.
Sources
- ✓CBIC notifies 1 October 2025 for Finance Act 2025 GST provisions, TaxO
- ✓Advisory: new changes in IMS, CGST Kochi
- ✓Changes under GST law, TaxTMI
This is a summary, not legal advice. Confirm with your chartered accountant before you rely on it.
Written by
Founder, Airwix Technologies (Sleet)
Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.
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