Optimizing Credit Note Processing with India's Invoice Management System (IMS) under GST

The introduction of an Invoice Management System (IMS) significantly changes how credit notes are managed within the Goods and Services Tax (GST) framework. This system aims to streamline operations and improve regulatory adherence by ensuring precise reporting of credit notes in GST filings, thereby minimizing financial disruptions.

Pre-IMS Workflow: Input Tax Credit Reversal on Credit Notes

Before an Invoice Management System (IMS) was implemented, handling credit notes involved a laborious manual process. Reversing Input Tax Credit (ITC) linked to these notes was particularly complicated.

1. The seller issued a credit note to the buyer.
2. The buyer confirmed receipt of the credit note.
3. ITC adjustments were performed manually, increasing the risk of inaccuracies.

This previous workflow frequently led to delays and computational errors. A diagram previously depicted the laborious nature of these steps.

Legal Amendments Pertaining to the Invoice Management System (IMS)

While the IMS was introduced in September 2024, its integration into GST legislation only occurred following the 55th GST Council meeting. After thorough discussions in December 2024, the GST Council proposed significant amendments to fortify the existing regulatory structure. These crucial modifications were deliberated at the 55th GST Council meeting.

Amendments to CGST Section 38 and CGST Rule 60 are expected to establish a legal basis for generating GSTR-2B forms based on IMS activities. Additionally, CGST Section 39(1) will be modified to permit GSTR-3B filings only after the GSTR-2B becomes available on the official GST portal.

To promote the use of IMS for credit note processing, further amendments have been proposed. The Council recommended revisions to CGST Section 34(2) to explicitly define input tax credit adjustments for both suppliers and recipients. When a credit note is issued by a supplier, recipients are now mandated to reverse the associated input tax credit, which allows suppliers to subsequently decrease their output tax liabilities. Furthermore, a new CGST Rule 67B introduces detailed guidelines on how suppliers can modify their output tax obligations in connection with issued credit notes, clarifying the adjustment process.

Post-IMS Workflow: Implications for Credit Notes

Following the deployment of IMS, the operational flow for managing credit notes has undergone a substantial transformation.

Suppliers are required to act appropriately when credit notes are rejected. Non-compliance could result in discrepancies in GSTR-3B and official notifications for tax underpayment. Previously, credit notes and other relevant documents could not be left unresolved; recipients had to either accept or reject them. However, a recent GSTN advisory issued on September 23, 2025, now permits these records to remain pending for a single tax period—one month for monthly filers and one quarter for quarterly filers.

These records include:

• Credit notes, or an upward adjustment of a credit note.
• Downward adjustment of a credit note where the initial credit note was rejected.
• Downward adjustment of an invoice or debit note, provided the original invoice was accepted and GSTR-3B has been filed.
• ECO-Document downward adjustment, only if the original was accepted and GSTR-3B has been filed.

Input Tax Credit (ITC) reversals are now automated and fully compliant with GST regulations. A diagram previously illustrated this updated process.

Practical Example: Credit Note Handling with IMS

Consider a transaction involving Supplier