The Central Board of Indirect Taxes and Customs (CBIC) on Friday issued a fresh clarification on how secondary or post-sale discounts should be treated under GST, addressing doubts for manufacturers, dealers, and distributors. The move is aimed at bringing uniformity in implementation across tax authorities and reducing disputes.
Full ITC allowed despite post-sale discounts
The circular clarified that when a supplier gives a discount after the sale through a financial or commercial credit note (instead of a GST credit note), the buyer does not have to worry about reversing Input Tax Credit (ITC).
CBIC said that a financial or a commercial credit note only adjusts the payment between the supplier and the buyer — it does not change the taxable value or GST amount charged in the original invoice. Since the GST liability on that invoice remains the same, the buyer’s entitlement to ITC also stays the same.
For instance lets say a manufacturer sells goods worth ₹1,00,000 + ₹18,000 GST to a dealer. Later, the manufacturer gives a ₹10,000 discount via a financial credit note. Here the GST remains ₹18,000 and the dealer can still claim full ITC, even though he paid only ₹1,08,000 (₹90,000 + ₹18,000).
Discounts between dealers and manufacturers
When manufacturers give discounts to dealers to help them offer competitive pricing, these are treated as price reductions and not as payments for services. Such discounts, given on a principal-to-principal basis, are not part of “consideration” under GST. Simply put, dealers don’t need to treat these discounts as taxable income for services.
Lets say a dealer buys shoes at ₹1,000 + GST from a manufacturer. Later, the manufacturer gives ₹50 discount per pair to push sales. Here the sale price reduction will not impact the total GST.
Discounts linked to agreements
The circular draws a distinction in cases where a manufacturer has an agreement with the end customer to supply goods at a lower price. If the manufacturer issues a credit note to the dealer to ensure the final customer gets the discounted rate, such a discount will be considered part of the overall “consideration” for supply.
For example, if the manufacturer signs an agreement with a corporate buyer that the shoes must be sold to employees at ₹900, the manufacturer issues credit notes to the dealer to cover the discount. In this case, the discount is linked to the end sale and becomes part of consideration—GST impact may arise.
Separate GST liability for promotional activities
CBIC stated that if dealers merely use the discount to push sales, no extra GST applies. However, if they undertake specific promotional activities like advertising, co-branding, exhibitions, or customer support on behalf of the manufacturer under a clear agreement, then GST will apply on those services separately.
Vivek Baj, partner, Economic Laws Practice called this is a welcome step because earlier, he said. many such discounts were being questioned by tax authorities as hidden payments for promotional services, which created a lot of disputes.
“The clarification, along with the GST Council’s recent proposal to remove the requirement of proving discounts through agreements, will go a long way in reducing unnecessary litigation. Since the clarification is clarificatory in nature, it will also help resolve ongoing cases from the past,” Bajaj added.
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