GST Council eases rules on credit notes, relief for FMCG players

The GST Council has given relief to businesses, particularly fast-moving consumer goods companies, by removing the rule that required credit notes to be linked with invoices. The earlier requirement had complicated matters for manufacturers, wholesalers, dealers and retailers across the supply chain.

Credit notes are frequently used in business transactions across the chain, from manufacturers to wholesalers, then to dealers and finally retailers. While there was no difficulty when goods moved smoothly to retailers, complications arose in the case of products with shorter shelf lives.

Toothpaste is one example. It may carry a shelf life of a year, but if it remains unsold at the retailer for nine or ten months, it is returned to the company. In such cases, credit notes move back through the chain. The previous rules demanded that each credit note had to be matched with an invoice, leading to an enormous compliance exercise. For large firms such as Hindustan Unilever and Colgate, this meant reconciling billions of invoices and credit notes.

The new rules remove this burden. “There will be no need in future to link credit notes to specific invoice numbers, removing a long-standing pain point for all businesses,” ToI cited M S Mani, partner at Deloitte. He added, “Businesses have been representing since the beginning of GST that credit notes are issued for various reasons and it is essential that GST, being a business tax, aligns its provisions with business practices and not the other way round.”

The change also brings relief on discounts, which often led to compliance disputes. “Taxpayers across various sectors commonly issue commercial credit notes for reasons, such as post-sale discounts. With the proposed relaxation of the requirement to establish a prior agreement for discounts before or at the time of supply, taxpayers may now be eligible for reductions even when such discounts are given post the sale. This change enhances commercial flexibility and aligns with evolving business practices. Additional clarifications regarding the treatment of post-sale discounts are anticipated in an upcoming circular,” PricewaterhouseCoopers said.

Industry watchers say the shift is likely to reduce paperwork, ease cash flow management, and help firms in sectors where unsold stock often travels back through the supply chain. FMCG players are seen as the biggest beneficiaries, but the impact will extend across other industries where discounts and product returns are frequent business practices.(with ToI inputs)