When Discounts Arrive Late: A Practical Guide to Post-Sale Discounts & Credit Notes Under GST
1.Why post-sale discounts still confuse everyone
Volume rebates, scheme discounts, year-end incentives, rate protection, price-drop support - in real life, most big-ticket business happens after the basic invoice is raised. Commercial teams liberally promise "extra 2% at year-end", but the tax team is then left asking:
Can we reduce GST already paid on the original invoice?
Does the dealer have to reverse ITC - and how do we prove it?
Is this just a discount, or has it become "consideration" for marketing / promotional services?
Should we issue a GST credit note or only a financial / commercial credit note?
Because the answers sit at the intersection of section 15 (value of supply) and section 34 (credit notes), plus multiple CBIC circulars (some issued, some withdrawn, some newly issued), post-sale discounts have been a fertile ground for disputes, especially in FMCG, auto, pharma and electronics.
This article walks through the current legal position (as of late 2025), the latest CBIC circulars, and the proposed changes recommended by the 56th GST Council meeting, with a clear focus on how businesses should structure and document their schemes.
2.Core legal framework: Section 15 & Section 34
2.1 Section 15 value of supply and discounts
Section 15(1) of the CGST Act says value is the "transaction value" - price actually paid / payable, where supplier and recipient are unrelated and price is the sole consideration. Section 15(2) then adds certain elements (taxes, incidental expenses, interest, subsidies linked to price, etc.) back into that value.
Section 15(3) carves out the specific treatment of discounts:
Pre-supply discounts (cash discount, on-invoice trade discount, etc.) can be excluded from value if they are shown on the tax invoice.
Post-supply discounts can also be excluded, but only if all of the following are satisfied (clause (b)):
1. The discount is established in terms of an agreement entered into at or before the time of supply;
2. The discount is specifically linked to relevant invoices; and
3. The recipient reverses ITC attributable to such discount.
If any of the above fails, you may still give a commercial discount, but the taxable value under GST will not reduce.
2.2 Section 34 credit notes and the November deadline
Section 34 allows a supplier to issue a credit note if:
Taxable value / tax charged on invoice exceeds what is actually payable; or
Goods are returned; or
Goods / services are found deficient.
Key points today:
Credit notes must be declared in GSTR-1 for the month of issue, but not later than 30 November of the following financial year or the date of filing annual return, whichever is earlier.
Only when credit notes are so declared can the supplier reduce output tax.
A newly substituted proviso (inserted by the Finance Act, 2025) provides that no reduction in output tax liability is allowed if:
1. The attributable ITC has not been reversed by the recipient (if registered); or
2. The tax incidence has been passed on to another person (in other cases).
Interestingly, the bare-law compilation notes that this amended proviso is inserted but not yet notified for enforcement, so technically the earlier wording still operates until notification. However, the direction of policy is crystal clear: tax reduction via credit note is allowed only where ITC reversal / no unjust enrichment is ensured.
3. Two broad buckets of post-sale discounts in practice
In GST parlance, all post-sale discounts eventually flow through some kind of credit note. But not all credit notes are equal.
3.1 Bucket 1 GST credit notes (with tax component)
Here, the supplier issues a credit note with GST, declares it in GSTR-1, and reduces its output tax liability. This is the classic route when Section 15(3)(b) conditions are satisfied.
Conditions & consequences:
Discount is pre-agreed in contract / scheme circular;
Discount is linked to specific invoices(often via excel annexure, scheme codes, etc.);
Recipient reverses proportionate ITC; evidence is maintained.
Supplier adjusts tax in GSTR-3B based on GSTR-1 credit note details;
Buyer reverses ITC either through GSTR-3B or books.
This route maintains full tax neutrality in the chain.
3.2 Bucket 2 Financial / commercial credit notes (without tax)
In many cases, conditions of Section 15(3)(b) are not met or parties do not want the compliance pain of ITC reversal. The supplier then issues a purely financial / commercial credit note without GST, adjusts only the commercial value (and not the tax).
CBIC Circular 251/08/2025-GST dated 12-09-2025 squarely addresses this scenario:
Where no tax component is shown in the credit note and the original transaction value / tax remain unchanged:
The supplier cannot reduce output GST.
The recipient is not required to reverse ITC, because ITC relates to the original taxable value, which is unchanged.
Such adjustments are treated as pure commercial arrangements, not affecting GST, unless they are in substance consideration for some other supply (e.g. promotional services).
The same circular clarifies that this position now applies prospectively and to past disputes, bringing closure to long-running controversy where departmental officers insisted on ITC reversal even for financial credit notes.
4. The circular roller-coaster: 2019 to 2025
To understand why this 2025 circular was needed, it helps to see the timeline.
4.1 2019 Circular 105/24/2019-GST and its abrupt withdrawal
Circular 105/24/2019-GST (28-06-2019) tried to clarify treatment of secondary or post-sales discounts, giving examples where discount was mere price reduction vs consideration for service.
Due to strong industry push-back and potential interpretational issues, it was withdrawn ab initio by Circular 112/31/2019-GST (03-10-2019).
Result: the law reverted to bare Section 15(3) with no binding circular, and disputes continued.
4.2 2024 Circular 212/6/2024-GST and the CA-certificate requirement
In June 2024, CBIC issued Circular 212/6/2024-GST, laying down a mechanism to evidence ITC reversal where post-sale discounts were given via tax credit notes:
For discounts above a threshold (Rs. 5 lakh per recipient per FY), suppliers had to obtain CA / CMA certificate from recipients confirming ITC reversal.
For smaller amounts, a self-undertaking from the recipient would suffice.
While the objective was to ensure Section 15(3)(b)(ii) compliance, in practice it created massive compliance burden, and some High Courts also saw aggressive use of this by the department in litigation
4.3 2025 Council rethink and Circular 251 & 253
The GST Council's August 2025 newsletter and the 56th GST Council meeting (3-09-2025) record two important decisions
To rescind Circular 212/6/2024-GST, recognising the hardship.
To issue a fresh circular clarifying:
No ITC reversal for financial credit notes;
Clarified conditions when discounts become consideration for other supplies (inducement for dealer's supply to end customer, or for promotional activities).
This culminated in Circular 251/08/2025-GST, which:
Confirms no ITC reversal where discounts are given through financial / commercial credit notes without GST.
Explains when post-sale discounts are consideration for:
inducement of dealer's supply to a specific end customer; or
promotional / visibility activities (displays, branding, special schemes).
Separately, Circular 253/10/2025-GST (01-10-2025) explicitly withdraws Circular 212/6/2024, removing the CA-certificate / undertaking requirement.
Net result today:
For GST credit notes, you still need ITC reversal but you decide how to document it (no mandatory CA certificate).
For financial credit notes, no ITC reversal is needed, as long as tax & value remain unchanged and the discount is not consideration for any other supply.
5. Choosing between GST credit note and financial credit note
From a practical standpoint, every scheme or year-end negotiation boils down to a decision tree:
5.1 When to use a GST credit note (with tax)
Use this route where:
1. The discount is clearly linked to the original supply, not to a separate service;
2. Section 15(3)(b) conditions can be demonstrably met:
Pre-existing agreement / scheme circular (until 15(3)(b)(i) is actually omitted by law);
Invoice-wise linkage;
Recipient agrees to reverse ITC.
3. You want to reduce your GST outgo on that supply.
Impact:
Supplier issues GST credit note, shows original taxable value and GST, and then reduces both.
Recipient reverses ITC proportionately.
Tax chain remains neutral.
Illustration (simplified):
Original invoice: Rs. 1,00,000 + 18% GST = Rs. 1,18,000.
Year-end discount: 5% (Rs. 5,000) based on pre-agreed volume scheme.
Supplier issues GST credit note for Rs. 5,000 + Rs. 900 GST (assuming all conditions met).
Supplier reduces output tax by Rs. 900 in GSTR-3B; recipient reverses ITC of Rs. 900.
5.2 When to use a financial / commercial credit note (without tax)
Choose this route where:
Conditions of Section 15(3)(b) are not satisfied (no prior agreement, no invoice-linkage), or
Recipient refuses to reverse ITC, but parties still want to adjust commercial value, or
It's commercially simpler to keep GST untouched.
Impact:
Supplier issues a simple credit note for Rs. 5,000 without any GST.
Books in both entities reflect lower net price, but GST liability and ITC remain unchanged.
No ITC reversal required, as clarified by Circular 251.
This is often the only feasible path in legacy disputes or when aligning old contracts.
6. When a "discount" becomes a taxable service
A big area of litigation has been whether certain "discounts" are actually consideration for services from dealer to manufacturer, especially:
Inducement to sell at a particular price to a specific end customer; or
Promotional / visibility activities in-shop branding, special displays, sampling, etc.
Circular 251/08/2025-GST provides useful tests:
1. Pure price-based discount (no obligation):
Discount merely reduces effective purchase price and is not tied to any obligation beyond buying / reselling goods.
No separate supply of service; discount is either a Section 15(3)(b) discount (if conditions met) or a commercial adjustment (financial credit note).
2. Discount tied to dealer's obligation to pass benefit to specified customer:
E.g. manufacturer tells dealer: "Sell to Customer X at Rs. 90 instead of Rs. 100; I'll give you Rs. 10 later as discount'."
Here, the dealer's supply to Customer X is being induced by manufacturer; discount may be treated as consideration for that facilitated supply and clubbed with the dealer's value of supply (affecting GST).
3. Discount for promotional activities:
If discount is conditional on dealer providing defined deliverables - visibility, shelf space, in-shop branding, etc. - it may be seen as consideration for marketing service from dealer to manufacturer, taxable separately at service rate.
Accordingly, drafting of scheme documents is critical:
If your commercial intent is pure price support, avoid language that reads like a service contract.
If you genuinely want promotional services, treat them like a separate taxable supply, with a proper invoice from dealer and corresponding ITC to manufacturer (subject to Section 16 & 17 conditions).
7. The road ahead: proposed legislative changes on post-sale discounts
The 56th GST Council meeting (3 September 2025) has recommended important structural changes to the law
1. Omission of Section 15(3)(b)(i):
This would remove the requirement that post-sale discounts must be established under an agreement at or before the time of supply and linked to relevant invoices.
In practice, this recognises that modern trade schemes are dynamic and may be designed mid-year.
2. Amendment of Section 15(3)(b) and Section 34:
To provide that such post-sale discounts must be granted through a GST credit note under Section 34, and
To ensure a corresponding obligation of ITC reversal by recipient where value is reduced through such credit note.
3. Rescission of Circular 212/6/2024 and issue of new clarificatory circular (now 251/08/2025):
As discussed above, the CA-certificate regime is gone.
Important caveat: These Council decisions are recommendations, not law, until enacted by Parliament / State Legislatures and notified. As of now, Section 15(3)(b)(i) still appears in the bare law, and the Finance Act, 2025 amendments to Section 34's proviso await notification.
Businesses should therefore:
Track the actual amendment and notification dates, and
Re-calibrate contracts and ERP logic once the new regime kicks in.
8. Practical compliance checklist for businesses
Given this evolving landscape, a few discipline points can dramatically reduce your litigation risk:
1. Map all schemes clearly
Separate pure trade discounts (volume / turnover / price-protection) from service-like schemes (promotions, brand visibility, data sharing, etc.).
For the former, aim to comply with Section 15(3)(b); for the latter, treat them as separate services.
2. Contract & scheme drafting
Until 15(3)(b)(i) is formally omitted, ensure agreement at or before supply for any discount you want to treat as value-reduction.
Build invoice-wise linkage into your ERP and scheme circulars.
3. Decide upfront: GST credit note vs financial credit note
If ITC reversal is operationally feasible and legally required → GST credit note.
If not → financial credit note, but then accept that GST on original value remains.
4. ITC reversal documentation (post-Circular 253/10/2025)
No mandatory CA certificate, but keep:
■ Email / letter confirmations from dealers;
■ Ledger reconciliations;
■ Internal working sheets showing ITC reversal.
5. Monitor timelines
For GST credit notes, ensure declaration on or before 30 November of next FY or before filing annual return, whichever earlier.
6. Watch out for "hidden services"
If scheme language talks about branding, shelf-space, campaigns, etc., consider raising tax invoices for services instead of burying everything under "discount".
7. Stay updated on amendments
The post-sale discount regime is clearly in transition - with changes in Section 15(3), Section 34, and the circular framework. Assign someone in your tax team (or advisor) to track every new notification / circular.
9. Conclusion
Post-sale discounts are not going away; if anything, competition and modern trade will only make them more complex and more frequent. GST's original design already allowed such discounts to be excluded from taxable value, but the insistence on pre-agreed terms, strict invoice-linkage and ITC reversal created friction and disputes.
The recent policy shift - withdrawing the CA-certificate regime, clarifying that financial credit notes do not trigger ITC reversal, and proposing to loosen the "prior agreement" condition - shows that the Government recognises the need to align tax rules with commercial reality.
For businesses, the key is to:
Choose the right instrument (GST credit note vs financial credit note);
Document ITC reversal sensibly; and
Draft contracts and schemes with tax consequences in mind, not as an after-thought.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.