Post sale discounts: the agreement requirement and the credit note trail
A discount decided in April for a sale made in January is where valuation, credit notes and the recipient's reversal all collide.
Section 15(3)(b) permits exclusion of a post supply discount from the value where it is established in terms of an agreement entered into at or before the time of supply, is specifically linked to relevant invoices, and the input tax credit attributable to the discount has been reversed by the recipient. The requirement of a prior agreement has been the subject of amendment and clarification, and the position for each period must be verified. The practical requirements — a written scheme, invoice linkage and the recipient's reversal — remain constant.
The three conditions
The discount must be established in terms of an agreement entered into at or before the time of supply. A scheme announced after the sale does not satisfy this on the earlier text, which is why the written policy must precede the period.
It must be specifically linked to the relevant invoices. A lump sum credit note for a quarter, without invoice linkage, is the most common defect.
The recipient must have reversed the credit attributable to the discount. The supplier is required to establish this, which means obtaining a confirmation from the recipient — a practical problem in a distribution network with thousands of dealers.
Where any condition fails, the discount cannot be excluded, and the credit note is treated as a financial credit note without a tax adjustment.
Financial credit notes, and what they cost
A credit note that does not satisfy Section 15(3)(b) can still be issued commercially, but without a tax adjustment. The supplier bears the tax on the original value.
Circular 92/11/2019-GST addresses secondary discounts and the treatment where the conditions are not satisfied, and it should be read with the current text of the provision.
The department has also raised demands treating post sale discounts as consideration for a promotional service supplied by the dealer to the supplier. That characterisation is resisted by showing that the discount is a price adjustment and that no identifiable service was rendered.
Where the dealer does render a promotional service under an agreement with deliverables, the treatment is different and the dealer must charge tax on it.
Building the scheme correctly
Publish the discount scheme in writing before the period it covers, with the eligibility conditions and the computation.
Issue credit notes with invoice level linkage, or with a defensible allocation methodology recorded in the credit note itself.
Obtain the recipient's reversal confirmation as part of the claim process, so that the discount is credited only against confirmation.
Separate genuine promotional services from price adjustments contractually, so that each is treated on its own footing.
Authorities relied on
Clarified the treatment of discounts, including secondary discounts, and the consequence where the conditions in Section 15(3)(b) are not satisfied.
What to do on Monday
Publish every discount scheme in writing before the period it applies to.
Build invoice linkage into the credit note process, or record the allocation methodology.
Make the dealer's reversal confirmation a condition of the credit.
Contract separately for promotional services so they are not confused with price adjustments.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Can a discount decided after the sale be excluded from value?
Only if it satisfies the statutory conditions for the period, including the agreement requirement as it then stood. Verify the current text.
How do we prove the dealer reversed the credit?
By obtaining a confirmation as part of the claim process. Make the confirmation a condition of the credit.
Is a lump sum quarterly credit note acceptable?
Not without invoice linkage or a recorded allocation methodology. This is the most common defect.
Is a target based incentive a discount or a service?
A price adjustment where it is a reduction in consideration; a service where the dealer undertakes identifiable activities under an agreement. Separate them contractually.
What if we issue a financial credit note?
It adjusts the commercial position without a tax adjustment. The supplier bears the tax on the original value.
In this cluster
- Valuation under Section 15: transaction value and its exceptions
- Rule 28 in practice: related party and distinct person supplies
- Corporate guarantees between group companies: the one percent rule
- Northern Operating Systems: secondment, and the notice that follows every expatriate
- Cross charge of common costs between branches
- Mandatory Input Service Distributor: the compliance rebuild
- Free of cost supplies, warranty replacements and moulds
- Reimbursements and the pure agent exclusion under Rule 33
- Liquidated damages, penalties and notice pay recovery
- Vouchers and gift cards: the amended treatment
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.