Section 43 of the Central Goods and Services Tax Act, 2017 was originally introduced to provide a mechanism for matching a supplier’s claim for reduction in output tax liability with the corresponding reduction in input tax credit claimed by the recipient.
The provision was closely connected with the original GST return architecture, under which the details reported by a supplier and recipient were intended to be electronically matched. Section 43 specifically dealt with situations involving credit notes, reduction of output tax liability, discrepancies between the supplier’s and recipient’s declarations, duplicate claims, reversal of an incorrect reduction, and subsequent reclaim after rectification.
However, Section 43 is not part of the current operative CGST Act. It was omitted by the Finance Act, 2022 and the omission was brought into force with effect from 1 October 2022 through Notification No. 18/2022-Central Tax dated 28 September 2022.
It is also important to understand that the original matching mechanism under Sections 42 and 43 was associated with the GST return system involving GSTR-1, GSTR-2 and GSTR-3. That original two-way communication mechanism was never implemented in the manner originally contemplated. The GST Council subsequently recorded that Sections 42, 43 and 43A were omitted to move away from that two-way communication process and align the system with the GSTR-1, GSTR-2B and GSTR-3B framework.
Therefore, Section 43 is best understood as a historical provision of the original GST framework, rather than a provision that taxpayers should use for current GST compliance.
What Was Section 43 of the CGST Act?
Section 43 was originally titled:
“Matching, reversal and reclaim of reduction in output tax liability.”
The provision primarily concerned the reduction in a supplier’s output tax liability arising from a credit note relating to an outward supply.
The basic concept was:
Supplier issues credit note → Supplier reduces output tax liability → Recipient correspondingly reduces ITC → Details are matched → Reduction is accepted or discrepancy is communicated → Unresolved discrepancy may result in reversal of the reduction → Rectification may permit reclaim.
The provision was designed to prevent a supplier from reducing its output tax liability through a credit note without the corresponding recipient making the required adjustment to input tax credit.
Why Was Section 43 Introduced?
GST operates on a chain mechanism.
A supplier generally collects GST from the recipient and pays the applicable tax to the Government. The recipient, subject to the statutory conditions, may claim input tax credit.
Suppose a supplier sells goods for ₹1,00,000 plus ₹18,000 GST.
The supplier reports:
- Taxable value: ₹1,00,000
- GST: ₹18,000
- Total invoice value: ₹1,18,000
The recipient may claim the eligible ₹18,000 as input tax credit.
Now suppose the supplier subsequently issues a credit note reducing the taxable value by ₹20,000 and GST by ₹3,600.
The supplier would want to reduce its output tax liability by ₹3,600.
At the same time, the recipient would need to make the corresponding adjustment to its input tax credit.
The original Section 43 framework was intended to provide a mechanism for matching these two sides.
This was important because otherwise a supplier could potentially reduce its output tax liability without a corresponding reduction in the recipient’s ITC.
Credit Note and Reduction in Output Tax Liability
Credit notes were central to Section 43.
Under the original framework, a supplier could issue a credit note relating to an outward supply in circumstances permitted under the GST law.
The corresponding reduction in output tax liability was then subject to the matching mechanism contemplated by Section 43.
For example:
Original invoice:
| Particular | Amount |
|---|---|
| Taxable value | ₹1,00,000 |
| GST @ 18% | ₹18,000 |
| Total | ₹1,18,000 |
Later, the supplier issues a credit note:
| Particular | Amount |
|---|---|
| Reduction in taxable value | ₹20,000 |
| GST reduction | ₹3,600 |
The supplier’s output tax liability would be reduced by ₹3,600 under the original mechanism.
The corresponding recipient-side ITC reduction was an important part of the matching process.
How Did the Original Section 43 Matching Mechanism Work?
Section 43(1) provided that details of every credit note relating to an outward supply furnished by the supplier for a tax period were to be matched.
The details were intended to be matched with:
- the corresponding reduction in the recipient’s claim for input tax credit in the recipient’s valid return for the same tax period or a subsequent tax period; and
- duplication of claims for reduction in output tax liability.
Therefore, the original mechanism had two major objectives:
1. Matching the supplier and recipient adjustments
The supplier’s reduction in output tax liability had to correspond with the recipient’s reduction in input tax credit.
2. Preventing duplicate reductions
The system was also designed to identify situations where a supplier attempted to claim the reduction in output tax liability more than once.
Example of Matching Under Section 43
Consider the following example.
ABC Ltd. supplies goods to XYZ Ltd.
Original invoice:
- Taxable value: ₹5,00,000
- GST: ₹90,000
XYZ Ltd. claims ₹90,000 as ITC.
Later, ABC Ltd. issues a credit note reducing GST by ₹18,000.
The supplier therefore claims a reduction of ₹18,000 in its output tax liability.
Under the original Section 43 mechanism, the corresponding recipient adjustment would be examined.
XYZ Ltd. would correspondingly reduce its ITC claim by ₹18,000.
The system was intended to match:
ABC Ltd.’s output tax reduction = XYZ Ltd.’s ITC reduction
If the information matched, the supplier’s reduction could be finally accepted under the original framework.
What If the Supplier’s Reduction Was More Than the Recipient’s ITC Reduction?
Section 43(3) specifically addressed discrepancies.
Where the reduction in output tax liability claimed by the supplier exceeded the corresponding reduction in the recipient’s ITC claim, or where the recipient did not declare the corresponding credit note in its valid returns, the discrepancy was to be communicated to both persons in the prescribed manner.
For example:
Supplier’s credit note:
GST reduction = ₹18,000
Recipient’s corresponding ITC reduction:
₹10,000
Difference:
₹8,000
Under the original Section 43 mechanism, this would create a discrepancy because the supplier had reduced output tax liability by ₹18,000 while the corresponding recipient adjustment was only ₹10,000.
The discrepancy was intended to be communicated through the prescribed GST system.
What If the Recipient Did Not Declare the Credit Note?
Another important situation was where the supplier issued and reported a credit note but the recipient did not declare the corresponding reduction in ITC.
For example:
Supplier:
Output tax reduction = ₹25,000
Recipient:
Corresponding ITC reduction = Nil
This would result in a mismatch under the original Section 43 framework.
The discrepancy was intended to be communicated to both parties.
The recipient could then rectify the relevant information through the prescribed return mechanism.
Reversal of Reduction in Output Tax Liability
Section 43 also provided for consequences where a discrepancy continued.
Under the original Section 43(5), an amount relating to a discrepancy communicated under sub-section (3), which was not rectified by the recipient in the prescribed return, was to be added to the supplier’s output tax liability in the subsequent return as prescribed.
This mechanism effectively prevented the supplier from retaining the reduction in output tax liability when the corresponding recipient-side adjustment remained unresolved.
In simple terms:
Unresolved discrepancy → supplier’s tax reduction reversed → amount added back to output tax liability.
Duplicate Claims for Reduction in Output Tax Liability
Section 43 also addressed duplication.
A supplier could not claim the same reduction in output tax liability more than once.
For example, suppose a supplier issued a credit note for GST of ₹10,000.
If the supplier accidentally reported the same credit note twice and attempted to obtain a ₹20,000 reduction instead of ₹10,000, the second claim could be treated as a duplicate claim.
Section 43(4) provided for communication of duplication of claims for reduction in output tax liability to the supplier.
The corresponding rules also contemplated electronic communication of duplicate claims through the common portal. Historical GST Council material records this mechanism.
Reclaim of Reduction in Output Tax Liability
The title of Section 43 included the word “reclaim” because the framework also contemplated restoration of the supplier’s reduction after the underlying discrepancy was properly rectified.
Suppose:
- Supplier issued a valid credit note.
- Supplier reduced output tax liability.
- Recipient initially failed to report the corresponding reduction in ITC.
- A discrepancy was communicated.
- The supplier’s reduction was consequently reversed.
- Recipient later corrected its return and declared the corresponding ITC reduction.
Under the original mechanism, the supplier could become eligible to claim the corresponding reduction again, subject to the prescribed conditions and procedure.
Historical GST Council material relating to the proposed rules specifically provided for a previously mismatched claim to be finally accepted after rectification by the supplier or recipient.
Interest Under the Original Framework
The original Section 43 also contained provisions concerning interest in situations involving an incorrect reduction in output tax liability.
Where a reduction was improperly retained in circumstances covered by the provision, the law contemplated addition of the relevant amount to output tax liability together with applicable interest.
The original return rules also contained a mechanism for refund of interest paid on a reversal where the relevant claim was subsequently reclaimed and accepted. Historical Rule 77 provided for such interest to be claimed through the return and credited to the electronic cash ledger, subject to the prescribed framework.
These provisions formed part of the original return architecture and should not be treated as current Section 43 procedures because Section 43 has since been omitted.
Matching Details Under the Original Rules
The historical rules associated with Section 43 provided for matching of specific information relating to the reduction in output tax liability.
The proposed matching details included:
- GSTIN of the supplier;
- GSTIN of the recipient;
- credit note number;
- credit note date; and
- tax amount.
The GST Council’s historical agenda material records these matching parameters.
This shows that Section 43 was intended to operate at the transaction level rather than simply comparing broad tax totals.
👉 Read More → Section 42 – Matching, reversal and reclaim of input tax credit
Electronic Communication Under the Original Framework
The original GST system contemplated extensive electronic communication through the common portal.
Historical rules provided for communication of:
- final acceptance of reduction in output tax liability;
- discrepancies;
- continued discrepancies;
- duplicate claims; and
- rectification.
For example, historical Rule 74 contemplated final acceptance of a matched claim through FORM GST MIS-1, while Rule 75 dealt with communication and rectification of discrepancies.
However, these provisions belonged to the original GST return architecture and should not be interpreted as current operational forms and procedures under Section 43.
Why Section 43 Did Not Become a Normal Current Compliance Procedure
An important point is often missed when studying Section 43.
Although Section 43 was enacted as part of the CGST Act, the matching mechanism depended on the original GST return architecture.
The original GST system contemplated a return process involving:
- GSTR-1;
- GSTR-2; and
- GSTR-3.
The two-way communication and matching process contemplated by Sections 42 and 43 was never implemented in the manner originally designed.
A GST Council agenda note specifically explained that the matching and reversal mechanism under Sections 42 and 43 was envisaged under the original return scheme comprising GSTR-1, GSTR-2 and GSTR-3, but that the original return scheme was not implemented.
Therefore, Section 43 should not be understood as a provision that operated through the regular current GSTR-1 and GSTR-3B filing system for taxpayers.
Omission of Section 43
The Finance Act, 2022 omitted Section 43 from the CGST Act.
The relevant provisions were brought into force from 1 October 2022 through Notification No. 18/2022-Central Tax dated 28 September 2022.
The current statutory position therefore records Section 43 as omitted.
India Code’s record identifies Section 43 as:
“[Matching, reversal and reclaim of reduction in output tax liability] — Omitted by the Finance Act, 2022, section 107 (w.e.f. 1-10-2022).”
Why Were Sections 42 and 43 Omitted Together?
Sections 42 and 43 were closely connected.
Section 42 dealt with:
Matching, reversal and reclaim of input tax credit.
Section 43 dealt with:
Matching, reversal and reclaim of reduction in output tax liability.
Both provisions depended upon the original two-way matching architecture.
The GST Council’s records explain that Sections 42, 43 and 43A were omitted to do away with the two-way communication process in return filing and to align the GST Rules with the GSTR-1/GSTR-2B/GSTR-3B return filing system.
Thus, the omission was not an isolated change to Section 43. It formed part of a broader restructuring of the GST return framework.
Section 43 and Section 34
Section 43 should also be distinguished from Section 34 of the CGST Act.
Section 34 deals with credit and debit notes.
Section 43 was concerned with the proposed matching and reversal mechanism for a supplier’s reduction in output tax liability arising from a credit note.
Therefore:
- Section 34 — statutory provisions concerning credit notes and debit notes.
- Section 43 — historical matching, reversal and reclaim mechanism for the resulting reduction in output tax liability.
The omission of Section 43 did not mean that credit notes ceased to exist under GST.
Credit-note provisions continue to be governed by the provisions currently applicable to Section 34 and the related GST rules.
Section 43 and the Current GST System
A taxpayer should not use the old Section 43 matching mechanism for current GST compliance.
For current transactions, the taxpayer must follow the provisions applicable to credit notes, returns and output tax liability under the law currently in force.
The historical process involving:
credit note → recipient GSTR-2 → system matching → GST MIS forms → reversal under Section 43 → reclaim
should not be presented as the current GST procedure.
The GST Council specifically recorded that the rules had to be amended after the omission of Sections 42, 43 and 43A so that they could align with the GSTR-1, GSTR-2B and GSTR-3B return system.
Difference Between Section 42 and Section 43
Sections 42 and 43 were similar in structure but addressed different sides of the GST chain.
| Particular | Section 42 | Section 43 |
|---|---|---|
| Original subject | Input tax credit | Reduction in output tax liability |
| Main document | Inward supply information | Credit note relating to outward supply |
| Main parties | Recipient and supplier | Supplier and recipient |
| Matching | ITC claim with supplier’s supply details | Supplier’s output tax reduction with recipient’s ITC reduction |
| Reversal | Unmatched ITC | Incorrect/unmatched reduction in output tax liability |
| Reclaim | ITC after rectification | Reduction in output tax liability after rectification |
| Duplicate claim | Duplicate ITC | Duplicate reduction in output tax liability |
| Current status | Omitted | Omitted |
| Effective omission | 1 October 2022 | 1 October 2022 |
The GST Council’s records confirm that both provisions were removed as part of the same transition away from the original two-way return communication model.
Example of the Original Section 43 Framework
Consider a supplier, ABC Ltd., that sold goods to XYZ Ltd.
Original invoice
Taxable value:
₹10,00,000
GST:
₹1,80,000
XYZ Ltd. claimed eligible ITC of ₹1,80,000.
Subsequent credit note
ABC Ltd. later issued a credit note reducing the taxable value by ₹2,00,000.
GST reduction:
₹36,000
ABC Ltd. therefore claimed a reduction of ₹36,000 in output tax liability.
Recipient’s corresponding adjustment
XYZ Ltd. should correspondingly reduce its ITC by ₹36,000 under the original matching framework.
Matching
The supplier’s ₹36,000 reduction and recipient’s ₹36,000 ITC reduction correspond.
Under the original Section 43 mechanism, the claim could be finally accepted.
If the recipient reported only ₹20,000
A discrepancy of:
₹36,000 − ₹20,000 = ₹16,000
would arise.
The discrepancy was intended to be communicated to the relevant parties.
If the discrepancy remained unresolved
The relevant amount could be added back to the supplier’s output tax liability according to the original statutory mechanism.
If the recipient subsequently rectified the return
The original framework contemplated the possibility of the supplier reclaiming the eligible reduction after rectification.
This example explains the historical design of Section 43. It should not be used as a description of the current GST return process.
Importance of Section 43 for GST Students
Section 43 remains relevant for anyone studying:
- the history of GST return filing;
- the original GST legislation;
- the development of the ITC framework;
- credit-note treatment under the original return system;
- GST matching concepts;
- the transition from the original return architecture to the current system.
It is particularly important when reading older GST textbooks, judgments, professional study material, circulars or articles written before October 2022.
Such material may contain references to:
- Section 43;
- GSTR-2;
- GSTR-3;
- GST MIS-1;
- GST MIS-2;
- matching of credit notes;
- provisional acceptance;
- reversal of reduction in output tax liability; and
- reclaim of reduction.
These references need to be understood according to the law and return framework applicable during the relevant period.
Common Mistakes About Section 43
Mistake 1: Treating Section 43 as a current operative provision
Section 43 was omitted with effect from 1 October 2022.
Therefore, it should not be described as a current compliance provision.
Mistake 2: Saying that every current credit note is matched under Section 43
This is incorrect.
Current credit-note compliance must be examined under the provisions currently in force, particularly Section 34 and the applicable rules.
Mistake 3: Treating GSTR-2 as a current return
The original GSTR-2 based matching architecture was not implemented in the manner originally contemplated and the relevant provisions were subsequently removed.
Mistake 4: Assuming Section 43 was a normal GSTR-3B procedure
Section 43 belonged to the original matching architecture associated with GSTR-1, GSTR-2 and GSTR-3.
It was not the mechanism used for ordinary current GSTR-3B filing.
Mistake 5: Assuming omission of Section 43 abolished credit notes
The omission of Section 43 did not abolish the concept of credit notes.
Section 43 concerned the matching mechanism for the reduction in output tax liability; credit-note provisions are separately dealt with under the GST law.
Section 43 and the Transition to the Current Return System
The GST return framework has undergone significant changes since the enactment of the CGST Act.
The original architecture was based on a more extensive two-way flow of information between suppliers and recipients.
The later system evolved around:
- supplier reporting through GSTR-1;
- system-generated information through GSTR-2B; and
- recipient return filing through GSTR-3B.
The omission of Sections 42, 43 and 43A was part of this transition.
The GST Council’s records specifically state that the corresponding CGST Rules were being amended because Sections 42, 43 and 43A had been omitted and the rules needed to be aligned with the GSTR-1/GSTR-2B/GSTR-3B return filing system.
Key Points to Remember
The important points regarding Section 43 are:
- Section 43 was originally titled “Matching, reversal and reclaim of reduction in output tax liability.”
- It primarily dealt with matching the supplier’s reduction in output tax liability arising from a credit note with the corresponding reduction in the recipient’s ITC.
- It also sought to identify duplicate claims for reduction in output tax liability.
- The original provision contemplated electronic communication of discrepancies.
- Where discrepancies remained unresolved, the supplier’s reduction could be reversed through addition to output tax liability under the original mechanism.
- Rectification could allow the supplier to reclaim the eligible reduction.
- The original framework depended on the planned two-way GST return system.
- The original GSTR-1, GSTR-2 and GSTR-3 matching architecture was not implemented in the manner originally contemplated.
- Section 43 was omitted by the Finance Act, 2022.
- The omission became effective from 1 October 2022 through Notification No. 18/2022-Central Tax dated 28 September 2022.
- Sections 42, 43 and 43A were omitted as part of the move away from the earlier two-way communication process in GST return filing.
- The current GST system is aligned with the GSTR-1, GSTR-2B and GSTR-3B framework.
- Current credit-note compliance should not be performed using the old Section 43 matching mechanism.
- Section 43 remains important for understanding the historical development of GST return filing and credit-note matching.
Conclusion
Section 43 of the CGST Act was originally designed to create a matching mechanism for reduction in output tax liability, particularly where a supplier issued a credit note.
Its original framework attempted to ensure that when a supplier reduced its output tax liability, the recipient made the corresponding reduction in input tax credit. It also provided for communication of discrepancies, reversal of an unresolved reduction, prevention of duplicate claims and reclaim after subsequent rectification.
However, the provision was closely linked to the original GST return architecture involving GSTR-1, GSTR-2 and GSTR-3. That two-way matching system was never implemented in the manner originally contemplated. The GST Council subsequently recommended amendments to align the GST framework with the GSTR-1, GSTR-2B and GSTR-3B system.
Section 43 was therefore omitted by the Finance Act, 2022, with the omission taking effect from 1 October 2022.
For current GST compliance, Section 43 should consequently be treated as a historical provision. Current treatment of credit notes, output tax liability and related adjustments must be determined under the provisions and rules that are presently in force.
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