Introduction
Discounts are an integral part of commercial transactions and are widely used by businesses to promote sales, reward dealers, and maintain long-term trade relationships. Under the GST regime, the treatment of discounts directly affects the valuation of supply and the tax liability of the supplier.
A common issue faced by businesses relates to post-sale discounts, which are discounts granted after the supply of goods or services has already been completed. Over the years, the GST law imposed certain strict conditions for allowing deduction of such discounts from the taxable value. These conditions often created practical difficulties and resulted in litigation between taxpayers and the tax authorities.
Recognizing these challenges, the Government has introduced significant amendments in the Union Budget 2026 to simplify the treatment of post-sale discounts under the GST framework.
This article examines the concept of post-sale discounts under GST, the legal provisions governing them, the issues faced under the earlier regime, and the changes introduced through the recent budget.
Legal Framework Governing Discounts under GST- Existing Provisions
Section 15 of the CGST Act, 2017 determines the value of supply. Section 15(3) specifically deals with the treatment of discounts, which reads as following:
15(3) The value of the supply shall not include any discount which is given —
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if —
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of a document issued by the supplier has been reversed by the recipient of the supply.”
Section 34 of the Act prescribes the conditions under which Credit Notes can be issued. Section 34 reads as follows:
34. (1) Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.
Treatment of Post-Sale Discounts Prior to Finance Act 2026
Before the amendments introduced through the Union Budget 2026 (before 30-03-2026), post-sale discounts were allowed as deduction from the value of supply only if the following all conditions were fulfilled:
a) Pre-existing Agreement – The discount must have been established in terms of an agreement entered into at or before the time of supply.
b) Linkage with Relevant Invoices- The discount must be specifically linked to the invoices relating to the original supply.
c) Reversal ITC – The recipient of the supply must reverse the proportionate input tax credit attributable to the discount.
As per section 34, a credit note could be issued by a supplier only in the following situations:
a) When the taxable value or tax charged in tax invoice is found to exceed the taxable value or tax payable in respect of such supply,
b) When the goods are returned by the recipient; or
c) When the goods or services are found to be deficient.
It is interesting to note that section 34 did not address issuance of Credit notes in case of post-sale discounts which was in contradictory to section 15.
Practical Challenges Under the Existing Provisions
While the objective of these provisions was to ensure tax compliance, the stringent conditions aroused several practical difficulties for businesses:
Restricted Commercial Flexibility
In many industries such as FMCG, Automobile dealerships, Electronics distribution, Pharmaceutical, supply chains discounts are determined after the sale has happened based on factors such as market conditions or dealer performance. The requirement of a prior agreement limited the ability of businesses to offer such commercially driven discounts.
Difficulty in Invoice-Level Linkage
Where discounts were based on overall turnover or cumulative sales targets, it was practically challenging to attribute such discounts to specific invoices.
Rise in Litigation
Tax authorities frequently disallow post-sale discounts that do not strictly comply with the prescribed conditions, resulting in increased disputes and litigation.
Non-allowance to issue Credit Notes u/s 34 for Discounts
Though section 15(3)(b) allows deduction of post-sale discount form the value of supply, however section 34 does not address issuance of Credit notes in case of post-sale discounts. Contradiction in both the sections led to ambiguity and required clarity.
Amendments Introduced in Finance Act 2026 with effect from 30-03-2026
In order to address these practical difficulties and align GST provisions with commercial practices, the Government has proposed amendments relating to post-sale discounts through the Union Budget 2026. Following has been proposed to be amended:
Section 15(3)(b) shall be read as:
(b) after the supply has been effected, if for such discount, a credit note has been issued by the supplier and input tax credit as is attributable to such discount has been reversed by the recipient of the supply, in accordance with the provisions of section 34.
Section 34(1) shall be read as:
34. (1) Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, or where a discount referred to in clause (b) of sub-section (3) of section 15 is given the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.
The proposed amendments bring the following important changes:
Removal of Requirement for Prior Agreement
The earlier requirement that the discount must be agreed upon at or before the time of supply has been relaxed. Businesses can now provide post-sale discounts even if they were not predetermined at the time of supply.
Relaxation of Invoice-Level Linking Requirement
The requirement of linking the discount to specific invoices has also been simplified, particularly in cases where discounts are based on overall sales performance or turnover.
Adjustment Through Credit Notes
Suppliers can now reduce the value of supply by issuing credit notes in accordance with Section 34 of the Act.
Mandatory ITC Reversal by the Recipient and Mechanism for Verification of ITC Reversal
It is mandatory for the supplier to ensure that the recipient has reversed the proportionate input tax credit corresponding to the discount amount reflected in the credit note.
Earlier, to address this issue, Circular No. 212/6/2024-GST dated 26-06-2024 was issued by the CBIC. The circular prescribed a mechanism for suppliers to obtain evidence that the recipient had reversed the proportionate ITC in respect of credit notes issued for post-sale discounts, in terms of Section 15(3)(b)(ii) of the CGST Act, 2017.
As per the circular, since there was no system-based functionality available on the GST portal to verify such ITC reversal, suppliers were required to obtain a certificate confirming ITC reversal. However, the aforesaid circular was subsequently withdrawn vide Circular No. 253/10/2025-GST dated 01-10-2025. As a result, the earlier prescribed mechanism for verification of ITC reversal no longer holds validity.
In the absence of the circular, the practical methods currently available to suppliers to ensure ITC reversal are through the Invoice Management System (IMS), or by taking voluntary confirmation from the recipient that ITC has been reversed.
Conclusion
Post-sale discounts are a common feature of modern business transactions and play an important role in strengthening supplier-dealer relationships. However, the earlier provisions under GST created significant compliance challenges due to strict requirements regarding prior agreements and invoice linkage.
The amendments proposed in the Union Budget 2026 represent a welcome step toward aligning GST law with practical business realities. By allowing greater flexibility in granting post-sale discounts while maintaining safeguards through credit notes and ITC reversals, the revised framework strikes a balanced approach between compliance and commercial practicality.
Author Bio
