The Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No. 251/08/2025-GST dated 12th September 2025, providing important clarifications on the treatment of secondary or post-sale discounts under GST. The move comes in response to numerous representations from industry stakeholders seeking clarity on the tax implications of such discounts.
This article provides a detailed breakdown of the clarifications issued and their implications for businesses, dealers, and tax professionals.
1. Input Tax Credit (ITC) in Case of Financial/Commercial Credit Notes
One of the most common queries relates to whether a recipient is required to reverse ITC when the supplier issues financial or commercial credit notes (without GST component).
- As per Section 16(1) of the CGST Act, a registered person is entitled to avail ITC on goods or services used in the course or furtherance of business.
- Earlier clarification (Circular No. 92/11/2019-GST) had established that suppliers can issue financial/ commercial credit notes without adjusting their tax liability.
- Since the transaction value and the tax charged remain unchanged, the recipient is not required to reverse ITC on account of such discounts.
Key Takeaway: Dealers can safely retain full ITC even when post-sale discounts are provided via financial/ commercial credit notes.
2. Are Post-Sale Discounts Consideration for Dealer’s Onward Supply?
Another concern was whether discounts offered by manufacturers to dealers should be treated as an inducement (i.e., consideration) for the dealer’s supply of goods to the end customer.
- Generally, there are two independent sales:
- Manufacturer → Dealer
- Dealer → End Customer
- Once the goods are sold to the dealer, the dealer becomes the owner. Discounts are given merely to enable competitive pricing and boost sales. These are not linked to any independent service to the manufacturer, and therefore, not includible in consideration.
Exception:
If the manufacturer has a specific agreement with the end customer to supply goods at a discounted rate, and issues financial/ commercial credit notes to the dealer so that the dealer sells at that discounted price, then such discount will be treated as part of the overall consideration.
Point to remember: Routine trade discounts are not taxable as consideration, but discounts tied to end-customer agreements may be considered part of consideration.
3. Post-Sale Discounts as Consideration for Promotional Activities
A common practice is for manufacturers to extend discounts to dealers who in turn carry out promotional efforts. The question arises – should such discounts be taxed as payment for services?
- When discounts are merely linked to the dealer’s own sales activities, they are not considered consideration for services. The dealer benefits by boosting his own sales and revenue.
- However, GST would apply where the dealer provides distinct promotional services such as:
- Advertising campaigns
- Co-branding or brand promotion
- Exhibition arrangements
- Customer support services
- Customization or sales drives
- In such cases, if there is an explicit agreement and defined consideration, it amounts to a separate supply of service, taxable under GST.
Point to remember: Post-sale discounts are not taxable as service unless linked to explicit promotional or marketing activities agreed upon between dealer and manufacturer.
Practical Implications for Businesses
- No ITC Reversal Required
Dealers can claim full ITC despite receiving financial/ commercial credit notes from manufacturers.
- Clarity on Trade Discounts
Routine discounts between manufacturers and dealers are not to be treated as service consideration.
- Agreements Need Careful Drafting
Businesses must carefully draft agreements with dealers and distributors, especially where discounts are linked to promotional activities, to avoid unintended GST liabilities.
- Reduced Litigation
By providing uniform clarity, the circular will help reduce disputes on discount-related ITC reversals and classification issues.
Conclusion
Circular No. 251/08/2025-GST brings much-needed clarity on the long-debated issue of secondary and post-sale discounts under GST. It ensures that trade incentives and credit note adjustments do not unnecessarily complicate ITC claims or attract misclassification as service consideration.
Businesses, dealers, and tax consultants should align their agreements, invoicing practices, and compliance records with these clarifications to avoid litigation and ensure smooth GST compliance.
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