Clarification needed about GST Credit Note, issued pursuant to rate change

The recent notification from the Ministry of Consumer Affairs, vide Notification No. I-10/14/2020-W&M dated September 9, 2025, has introduced a significant issue for manufacturers and traders. This notification allows for the affixing of new Maximum Retail Price (MRP) labels on pre-packaged goods due to a reduction in the GST rate, effective from September 22, 2025. This has created an urgent need for clarification regarding how to handle the GST liability on existing stock.

The Dilemma: GST Liability and Credit Notes

The central problem revolves around the goods that have already been sold by manufacturers to distributors before September 22, 2025, but are still lying with the distributors or retailers on or after this date. The initial GST was paid by the manufacturer based on the old, higher MRP and GST rate. However, with the new, lower GST rate coming into effect and new MRP labels being affixed, the final consumer price will be lower. This creates a situation where the tax collected by the manufacturer is higher than the tax that would be applicable on the revised, lower MRP.

A crucial question arises: can a manufacturer issue a GST credit note to the distributor for the difference in GST liability? This is where the provisions of Section 34 of the CGST Act, 2017 come into play.

Expert Commentary and Legal Interpretation

Section 34 of the CGST Act, 2017, governs the issuance of credit and debit notes. It primarily allows a supplier to issue a credit note for a tax invoice if:

• The taxable value shown in the tax invoice is higher than the actual taxable value.
• The tax charged in the tax invoice is higher than the actual tax payable.
• The recipient returns the goods.
• The goods or services supplied are found to be deficient.

In the case of a rate reduction, the second provision seems most relevant: “the tax charged in that tax invoice is higher than the tax payable for such supply.” The manufacturer’s initial invoice to the distributor was based on the old, higher GST rate. Post-rate reduction, the tax payable on that supply, considering the new MRP and final selling price to the end consumer, is lower.

However, a key point of contention is whether this provision applies when the goods themselves are not returned. The common practice and legal interpretation of Section 34 have been that a credit note is generally issued in a scenario where there is a change in the original transaction, often involving the return of goods or a price adjustment. In this unique situation, there is no return of goods, but rather a legislative change that affects the final price.

Expert Opinion: It is highly likely that the government will issue a specific clarification or a circular to address this. While a literal reading of Section 34(1)(b) could support the issuance of a credit note, it is not without ambiguity. Given the large-scale implications for the industry, a clear directive is necessary. The most probable outcome is that the authorities will permit the issuance of a credit note to reverse the excess GST liability. This is crucial to ensure that the burden of the higher tax, already paid to the government, is not borne by the manufacturer or the distributor.

The credit note, in this case, would not be for the entire value of the goods, but specifically for the GST element attributable to the reduction in rate. The distributor, upon receiving this credit note, would have to reverse the corresponding input tax credit (ITC) on their end, ensuring there is no revenue loss to the government. This mechanism would allow for a seamless transition to the new GST rate without penalizing businesses for stock already in the supply chain.

Conclusion and Call to Action

The issue is not about the legality of changing the MRP, which is permitted. It’s about the financial and tax-related adjustments required to facilitate this change. Without a clear directive, manufacturers and distributors are left in a state of uncertainty, risking non-compliance or financial loss. Therefore, an urgent clarification from the Central Board of Indirect Taxes and Customs (CBIC) is imperative.

The clarification should:

• Explicitly permit the issuance of GST credit notes for the tax differential.
• Detail the procedure for issuing and handling these credit notes.
• Specify the corresponding ITC reversal process for the recipient.

This will ensure that businesses can comply with the new regulations smoothly, without facing legal or financial repercussions due to the transitional provisions.