The Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No. 251/08/2025-GST Dated: 12th September, 2025, providing much-needed clarity on the GST implications of secondary or post-sale discounts. These post sale discounts are generally passed on by issuing the credit notes. In fact, in B2B trade parlance credit notes are issued on several occasions. This caused confusion among taxpayers and officers. The most common doubts are:
i. Do they require ITC reversal?;
ii. Should they be treated as part of the considered of supply?; or
iii. Are they even “consideration” for services?
Let’s break them down one by one.
ISSUE 1: Do Dealers Need to Reverse ITC When Discounts Come Through Financial Credit Notes?
The post-sale discounts passed on by a manufacturer ( supplier) to a dealer (recipient) are of several types. Depending on the agreement entered by both the parties, post sale discounts are issued on achieving certain targets, such as volume based targets, payment targets and even sales targets.
In terms of the provisions of Section 15 (3) ( b) of CGST Act, 2017, the supplier can reduce the value of a supply in case of a post sale discount , provided, the recipient reverses the ITC attributable to such discount. The relevant provision is as under:
(3) The value of the supply shall not include any discount which is given—
(a) …
(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.
Hence, whenever a credit note is issued in as per the above provision, the supplier is entitled to reduce such amount from his subsequent sales, subject to certain conditions including the reversal of the appropriate ITC by the recipient. Further, the supplier can reduce such an amount only when the credit note is linked to the original invoice. Since it is difficult to follow all these conditions, the suppliers often issue the financial credit notes.
Furthermore, as per the 3rd proviso to Section 16(2) of CGST Act, 2017, the recipient is entitled to the ITC only when he pays the entire amount along with tax to the supplier. All these conditions culminated to confusion whether the amount mentioned in a financial credit note is considered as non-payment of amount to the supplier and thereby falling under the scope of third proviso.
In this context, there were certain doubts among traders – whether a supplier can issue a financial /commercial credit note? If so, the recipient is still required to reverse the ITC. As far as issuance of a financial credit note is concerned, the department vide Circular No. 92/11/2019-GST dt. 3-7-2019 clarified that there is no bar on issuance of a financial/ commercial credit note by a supplier to the recipient. However, as the circular mainly covered the promotion schemes, the issue of post-sale discounts and requirement of ITC reversal was not resolved at that time.
Now, CBIC vide Circular No. 251/08/2025-GST Dated: 12th September, 20255 clarified that in case of a post-sale discount passed on by a supplier by way of a commercial credit note, there is no requirement of reversal of ITC. In this context, it is paramount important to understand what a commercial credit is note and how it is different from a regular credit note issued under Section 34. It can be understood as under:
Difference Between Normal Credit Note and Financial/Commercial Credit Note
| Basis of Difference | Normal Credit Note (u/s 34 of CGST Act) | Financial / Commercial Credit Note |
| Legal Reference | Section 34 of CGST Act, 2017 | Not specifically covered in law; permitted as per Circular No. 92/11/2019-GST and reaffirmed in Circular No. 251/08/2025 |
| Purpose | Issued to reduce taxable value and GST liability of supplier | Issued for commercial/ financial adjustments without disturbing GST liability |
| Tax Component | Includes tax element (supplier adjusts output tax) | No tax component (supplier cannot adjust output tax) |
| Impact on Supplier | Can reduce output tax liability (subject to conditions) | Cannot reduce output tax liability already paid |
| Impact on Recipient (Dealer) | Must reverse ITC proportionate to the tax shown in the credit note | No ITC reversal required since tax component is unaffected |
| Conditions | Discount must be pre-agreed, invoice-linked, issued within prescribed time (in case of a post-sale discount) | No such conditions; purely commercial arrangement |
Based on the above, when a recipient receives a post-sale discount through a financial credit note, reversal is not required as clarified by the CBIC, because this is considered a commercial adjustment rather than a tax adjustment. The tax originally paid by the supplier remains unchanged, with no adjustment made to it.
We can understand this by an illustration:
An FMCG dealer purchases goods of Rs.10,00,000/- . The tax payable on the same is 18%. Hence, the dealer pays Rs.11,80,000/- ( including GST). Now on achieving the target mutually agreed upon, the manufacturer passes on a post sale discount of 5%. Here, two situations would emerge.
Situation 1: The manufacturer issues a credit note of Rs.50,000/- along with the applicable tax of Rs.9,000/-. In this scenario, there would be a reduction in the tax already paid by the supplier. Since the credit note is a regular credit note under Section 34, the recipient has to reverse the ITC.
Situation 2: The manufacturer issues a financial credit note only to the extent of Rs.50,000/- and there is no tax element. In this scenario, the manufacturer would not reduce any tax .So, the original tax already paid by the manufacturer is intact. Hence, the recipient is not required to reverse any ITC.
Issue 2: Are Post-Sale Discounts “Consideration” for Dealer’s Sales to Customers?
In industries like automobiles, electronics, and FMCG, manufacturers often pass discounts to dealers so that the end customers get goods at a reduced price. This raised the question- are these discounts just commercial adjustments, or do they amount to consideration for the sales made by the dealers?
Section 2(31) of the CGST Act defines “consideration” as under:
( 31) “consideration” in relation to the supply of goods or services or both includes.
a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
From the above, it is clear that ‘consideration’ need not always flow only from the customer or recipient; it may also come from any other person. This gave rise to a doubt — can a post-sale discount received in this context be treated as ‘consideration’? If yes, would the dealer then be liable to pay tax on it?”
Now, CBIC vide this Circular draws a distinction:
1. No agreement with end-customer –
As clarified by CBIC, once goods are sold by the manufacturer to the dealer, the title in the goods passes on to the dealer, and the manufacturer has no further ownership or claim on the said goods. The dealer then sells the goods to customers on a principal-to-principal basis. Any discount offered by the manufacturer in such cases is only to make pricing more competitive and push sales. It merely reduces the effective sale price and is not linked to any independent service provided by the dealer to the manufacturer. Therefore, such discounts cannot be treated as consideration
2. Agreement with end-customer –
In situations where the manufacturer has a direct agreement with the end-customer to supply goods at a discounted price, the manufacturer may issue commercial/financial credit notes to the dealer to enable sales at the agreed lower price. In such cases, the discount acts as an inducement for the dealer’s supply to the end-customer and is therefore to be treated as part of the overall consideration.
Issue 3: Are the Post-sale discounts ‘consideration’ for services?
Another doubt was whether post-sale discounts can be regarded as consideration for services rendered by dealers to the manufacturer in relation to promotional activities?. CBIC has clarified that where the discount is given merely to reduce the sale price of goods, it is not linked to any separate service to the manufacturer and therefore cannot be treated as consideration for services.
However, if the dealer undertakes specific promotional activities under an agreement with the manufacturer — such as running advertising campaigns, co-branding exercises, arranging exhibitions, or providing customer-support services with a clearly defined consideration, then such payment will be regarded as consideration for a distinct supply of service. In such cases, GST will be leviable on the service element.
Key Takeaways:
1. No ITC reversal on financial credit notes – CBIC has clarified that if a supplier passes on a post-sale discount through a financial/ commercial credit note, the dealer is not required to reverse ITC. The original tax paid remains intact.
2. Normal credit notes under Section 34 – When a supplier issues a regular credit note with tax adjustment under Section 34 of the CGST Act, the supplier reduces his tax liability, and the recipient must correspondingly reverse ITC.
3. Discounts are not always “consideration” – Where there is no agreement between manufacturer and end-customer, discounts merely reduce the effective sale price and cannot be treated as consideration.
4. Discounts vs. promotional services – General turnover or performance-based discounts are not payments for services. However, if the dealer undertakes promotional activities (advertising, exhibitions, co-branding, etc.) under a separate agreement with defined consideration, then it is a supply of service liable to GST.
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Disclaimer: The author is a Superintendent in Central Taxes. The views expressed in this article are strictly personal.
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