Post-Sale Discounts Under GST: Clarification or Pandora’s Box of New Challenges?

Background

The treatment of post-sale discounts—also known as secondary discounts or incentives—has been a recurring area of ambiguity and litigation under Goods and Services Tax (GST) regime. These scenarios commonly arise when manufacturers grant additional discounts to dealers after the original supply of goods, often to boost sales or adjust pricing for competitive reasons. Disputes have revolved around the tax implications for such discounts, especially with respect to Input Tax Credit (ITC), valuation, and the potential classification as consideration for services rendered by dealers.

The CBIC previously issued Circular No. 105/24/2019-GST on 28.06.2019 to clarify these aspects. However, due to interpretational challenges and ongoing legal disputes, it was withdrawn. In response to continued representations and the GST Council's recommendations at its 56th meeting, a fresh Circular No. 251/08/2025-GST was issued on 12.09.2025, aiming to provide clear and uniform guidance.

Key Issues Addressed

1. Availability of Input Tax Credit (ITC) to Recipients When Financial/Commercial Credit Notes Are Issued
2. Whether Post-Sale Discounts Are 'Additional Consideration' in Dealer–End Customer Transactions
3. Classification of Post-Sale Discounts as Consideration for Promotional Activities by Dealers

Clarifications Issued in Circular No. 251/08/2025-GST

1. ITC on Financial/Commercial Credit Notes

• If a supplier issues a financial or commercial credit note (not a GST/tax credit note), there is no impact on the supplier’s original tax liability.
• The recipient is entitled to full ITC and is not required to reverse any ITC on account of such credit notes, since there is no reduction in the transaction value or tax.

2. Post-Sale Discounts as 'Additional Consideration'

• Principal-to-principal transactions: Where no downstream agreement exists, a discount from manufacturer to dealer is not treated as consideration for the dealer's supply to customers; it is merely a price reduction.
• Linked Discount Arrangements: However, if there is an agreement between the manufacturer and the end customer ensuring the dealer passes on a specific discount (e.g., under a scheme), such discounts must be included in the consideration for the supply by the dealer to the end customer, as they serve as an inducement funded by the manufacturer for that supply.

3. Post-Sale Discounts and Promotional Services

• General dealer activity: A post-sale discount to a dealer, not linked to specific activities, is not consideration for any separate supply of service. It is just a price adjustment.
• Specific promotional services: If the dealer undertakes specific, agreed promotional services (advertising, sales campaigns, co-branding, etc.) explicitly stated in the agreement and with defined consideration, then GST is chargeable as the dealer is supplying a distinct service to the manufacturer.

Challenges

• Implementation Complexity

Although many ambiguities have been addressed, interpretation complexity may still arise, especially for composite/commercial schemes and hybrid promotions.

• Nature of Dealer Activities

Demarcation between routine dealer activities and specific promotional services (with or without clear consideration) could be open to subjective interpretation, risking classification disputes

• Proof of Arrangement

Determining whether a “manufacturer-end customer agreement” exists may raise factual disputes, requiring documentation review and audit.

• Recharacterization Risk

Authorities may still re-characterise certain discounts or schemes as service provision, especially if documentary clarity is lacking.

Way Forward

• Contractual Clarity: Businesses must ensure that all discount schemes and dealer arrangements are properly documented, explicitly stating the nature and purpose of any discount or incentive.
• Regular Review: Companies should periodically review their incentive structures vis-à-vis the latest GST clarifications to ensure compliance and minimize risk.
• Training and Awareness: Both internal tax teams and external dealers should be trained on the differentiators between routine discounts and taxable promotional arrangements for GST.

Conclusion

The Circular clear, scenario-based clarifications to reduce ambiguity over post-sale discounts in GST. While it should diminish most disputes, the importance of accurate documentation and factual clarity remains paramount. For taxpayers, adopting best practices around documentation and transparency will be essential in leveraging these clarifications and avoiding future controversies.