Advisory : When to Avoid “GST Credit Note” mechanism ?

and when to make “Commercial Credit Note”

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.

But these clarifications, lead to a lot of “LEARNING and UNLEARNING”… new law, new situation.. and …..

Big potential Risk . for all those who continue to make CN as they were trained from 2017 to 2025.

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 ? in which situations ?

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 … NOTE… SHOULD BE USED if…

 

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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Many of our clients are using Finsys

Simple user friendly summary as under

1. Is the other party at risk with Commercial Credit Notes?

Short answer: risk is low if three conditions are respected:

• Discount is a pure price adjustment (no hidden “service” obligation in return).

• Supplier does not reduce taxable value or GST in returns (no GST credit note, only commercial note).

• Agreements, schemes and working are properly documented to show it is just a discount and not consideration for services.

If these are satisfied, the department cannot demand “GST on the commercial credit note”, because GST has already been fully paid on the original tax invoice at full value, and there is no new supply.

2. As a table – WHEN Commercial vs WHEN GST Credit Note appicable… and where full GST Invoice of the Dealer is best suited.

 

Case / Situation	What to issue?	Logic / Risk comfort (simple language)
1. Year‑end / volume rebate decided after the year, not mentioned in original PO/invoice	Commercial Credit Note	Pure commercial discount; original GST invoice and ITC remain as is; no GST shown on this note.
2. Rate protection / price drop after billing, adjusting old stock value, not pre‑agreed	Commercial Credit Note	Again, only price adjustment; no GST reduction claimed; buyer ITC not disturbed.
3. Manufacturer gives scheme discount so dealer can sell to end customer at lower price (no specific service obligations on dealer)	Commercial Credit Note	Circular specifically covers this; treated as post‑sale discount, not a service; no GST on credit note.
4. Dealer does general promotional activity on his own (extra display, pushing sales etc.) for his own stock, no written contract to provide services to manufacturer	Commercial Credit Note (if discount is given)	Considered normal trade discount; not treated as “marketing service” to manufacturer, so no separate GST.
5. Discount was pre‑agreed in contract / invoice, and is linked to particular invoice (conditions of Section 15(3)(b) are clearly met)	GST Credit Note	Section 34 credit note allowed; supplier reduces taxable value and GST; buyer must reverse proportional ITC.
6. Supplier wants to reduce his GST liability on original supply and is ready that buyer will do proportionate ITC reversal	GST Credit Note	Only this route changes tax; must ensure all legal conditions are satisfied and buyer actually reverses ITC.
7. Discount is actually consideration for clearly defined services by dealer (e.g. contract says “dealer will do XYZ promotion and get ₹X per month”)	Dealer’s Tax Invoice (plus optionally a Commercial Credit Note for any pure discount portion)	Here it is a service; safer for dealer to charge GST by his own invoice with IRN instead of only adjusting by discount.
8. Post‑sale discount given to dealer but in substance it is for sharing advertisement cost, clearly specified as such	Dealer’s Tax Invoice (manufacturer books as marketing expense)	To avoid argument that discount hides service consideration, better to raise proper GST invoice for service portion.

For day‑to‑day working, your thumb rule can be:

• If it is only price and no additional obligation = Commercial credit note.

• If you want to change GST on original invoice = GST credit note (with ITC reversal).

• If dealer is doing a distinct service or supply to manufacturer = Dealer’s own tax invoice with IRN.

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3. Five examples where dealer must raise his own GST invoice with IRN

These are the “dealer service / supply” cases you asked for – very useful for OEM–dealer networks and Finsys ERP configuration.

Example 1 – Warranty repair service billed to manufacturer

• Dealer repairs the machine at customer site under OEM warranty.

• Customer is not billed anything. Dealer raises a claim on manufacturer (labour charges, visit charges).

• Here, dealer is providing a service to the manufacturer.

• Action: Dealer must raise GST tax invoice with IRN on manufacturer for the service value; manufacturer can take ITC.

Example 2 – Warranty parts supplied from dealer’s own stock

• Dealer uses his own inventory (or buys from market) to replace a defective part under OEM warranty.

• Dealer then recovers the part value from manufacturer.

• This is a supply of goods from dealer to manufacturer (not a discount).

• Action: Dealer issues GST invoice with IRN to manufacturer for parts value; manufacturer takes ITC.

Example 3 – Structured promotional / marketing services

• Written agreement: dealer will conduct roadshows / demos / hoardings / social media campaigns for OEM against fixed or scheme-based consideration.

• This is a contracted marketing service.

• Action: Dealer must raise GST invoice with IRN to manufacturer for service charges; OEM books it as marketing expense with ITC.

Example 4 – Extended warranty sold by dealer

• Dealer sells extended warranty package (beyond standard warranty) to customer for a separate charge (either his own plan or OEM-backed).

• This is a separate supply of service to customer.

• Action: Dealer issues GST tax invoice with IRN to customer for extended warranty amount.

Example 5 – Service fee collected from customer during warranty

• Product under standard warranty, but dealer charges customer a “site visit / handling / inspection / fast service” fee of, say, ₹2,000.

• Even though repair is under warranty, this extra fee is a taxable service to customer.

• Action: Dealer raises GST invoice with IRN on customer for ₹2,000 plus GST.

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4. How to explain to GST officer – “Why no GST on Commercial Credit Note?”

Points you can standardise in your SOP / internal note:

• Full GST was charged and paid on original tax invoice at original price.

• Commercial credit note does not change taxable value or GST in returns.

• There is no separate supply; it is only a post‑sale price reduction, allowed commercially.

• Buyer continues with full ITC, as there is no reduction of tax at supplier side.

• Supporting documents: scheme circulars, agreements, board/management approvals, working sheets.

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.finsys.co.in