Discounts are an important tool in any company’s strategy since they help with market positioning, competitive pricing, customer retention and incentives. Yet, under GST, taxpayers have long suffered from uncertainty around whether various discount schemes should be taxed, whether they affect input tax credit (‘ITC’), or when they amount to ‘services’ rather than price reductions.
As a part of GST 2.0 reforms, certain amendments have been proposed in the legislature governing discounts. Moreover, certain clarifications have been provided vide Circular No. 251/08/2025‑GST dated 12 September 2025. On a comprehensive reading of the Circular and the proposed legislative amendments, it seems that though these clarifications have garnered a sigh of relief for taxpayers, several issues still remain open, and demand for a re-look at the discount schemes floated by the companies.
Legislative amendments: What is proposed?
The following legislative amendments have been proposed in the Press Release issued on 3 September 2025-
* Omit the requirement of linkage of discounts with the agreements and invoices
* Cross reference of Section 15(3)(b) in Section 34 and vice-versa
While cross referencing of Section 34 and Section 15(3)(b) and vice versa seems to be a clarificatory amendment specifically allowing issuance of GST credit notes in case of post supply discounts, which was otherwise also allowed, the omission of requirement of discount schemes with the agreement and linkage with relevant invoices seems to be a bigger relief for the taxpayers. This would mean that taxpayers are no longer required to have a discount policy in place to qualify for GST reduction and the discounts can be passed on without any pre-agreed terms as well. Though the omission of such conditions is a positive move for the taxpayers, it has ignited doubts as to what would qualify as discounts, particularly amidst the settled law on meaning of the term ‘discounts’ in pre-GST era which necessitated the requirement of having pre-agreed arrangements.
Will this amendment mean that any reduction in value by supplier to the recipient on account of reduction in price would be considered as discounts? Can unannounced schemes such as surprise discounts, stock liquidation discounts be covered under the amended provision? Will the clarifications differentiating between service and discounts, third party consideration are of no relevance? Though the intention of the law makers does not suggest so, however, the blanket omission of Section 15(3)(b)(i) may provide a leverage to the taxpayers in adopting such position. One will have to wait for the actual amendment and the clarification, if any, released by the Government before taking a final call.
No ITC reversal in case of commercial credit notes
The circular, clarifying non-reversal of ITC in case of issuance of commercial or financial credit notes is a step towards reducing the unnecessary litigation for the taxpayers. Although the said view was evident owing to numerous clarifications and decisions rendered in Service Tax Regime and Advance Rulings[1] pronounced under GST, certain doubts were still raised by tax authorities, post withdrawal of Circular No. 105 and in absence of any clarification under GST. It remains to be seen whether the disputes already initiated by the authorities on this point will be put to rest with the Circular’s clear-cut explanations on this issue.
Discounts vs Services
The circular has clarified that the post supply discounts offered by manufacturers to dealers are not to be treated as services in absence of any independent promotional services contract between the parties since these activities ultimately enhance the sale of goods of dealers, and the discount merely reduces the sale price. However, wherein a dealer undertakes specific sales promotional activities, such as advertising campaigns, co-branding, customization services, special sales drives, exhibition arrangements, or customer support services, etc., with a specified agreement and clearly defined consideration, the same would be taxable as services. This clarification aligns with pre-GST decisions and the earlier clarification issued vide Circular 105.
What remains unsettled, however, is whether manufacturers can claim ITC on service invoices and whether the discounts can be passed on through commercial credit notes. Further, what constitutes a ‘valid agreement’ is also required to be seen. Considering the practical scenarios, can email correspondence, scheme circulars, or terms and conditions mentioned in a purchase order be considered equivalent to an agreement to trigger GST liability?
Third Party Consideration – What’s clear and What’s not?
The other point of concern which the circular seeks to address is the taxability of ‘Third Party Consideration’ which essentially means that the consideration is paid by a third party for supply of goods between other two parties. Since definition of ‘consideration’ under GST law specifically acknowledges the payment by any party, other than recipient also within its ambit, the issue which was lingering in the industry was whether the amount paid by manufacturer to dealer for selling the goods at a reduced price to end consumer would be included in the value of supply undertaken by dealer to end consumer. The international jurisprudence (AP Group Limited, Australian GST Ruling 2014/1) was more or less settled on this aspect, necessitating the taxability of such amount, the reason being, the direct linkage of payment by manufacturer with the supply between dealer and customer.
Though Circular 105 had also indicated that the additional discount given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer would be liable to be added to the consideration payable by the customer, the same was later withdrawn, sparking doubts and uncertainty in Industry.
The present circular has clarified that in case there is no direct agreement between manufacturers and end consumer to offer a reduced price to consumer, discount provided to dealer cannot be included in consideration for supply of goods by the dealer to the end customer. Conversely, where there is an agreement between the manufacturer and the end customer to supply goods at a discounted price, the manufacturer may issue commercial or financial credit notes to the dealer and such discounts would form part of consideration for supply of goods by dealer to end customer and thus, taxable.
While the first part of this clarification gives relief to the taxpayers, the second part has stirred up the industry debate, forcing them to think what all scenarios could be covered under this and what would constitute as ‘valid agreement’. Whether such scenario would only cover supplies to B2B customers such as Government Departments or will it cover supplies to B2C customers such as corporates, employees wherein the end consumers are aware of the discount schemes even though there is no explicit agreement between the manufacturer and the end consumers? Whether the taxpayers can escape from the liability in case there is no explicit contract between manufacturer and customer? The other questions which have still remain answered are whether the end consumers or the manufacturer avail ITC of the amount paid by manufacturer? In case these clarifications are not provided, the taxpayers would be required to approach the courts to seek clarity on such issues.
Way forward
Overall, the Government’s clarification and amendments are much appreciated and provide welcome relief. It is hoped that they will also address the remaining ambiguities soon. What is now clear, however, is that this is an opportune moment for industry players to revisit their discount schemes to ensure they are aligned with these new clarifications and are compliant with the law.
[The authors are Executive Partner and Associate Partner, respectively, in GST consultancy practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] MRF Ltd. [2019 (27) G.S.T.L. 578 (App. A.A.R. - GST)]; Vedmutha Electricals India Pvt. Ltd. [2023 (75) G.S.T.L. 611 (A.A.R. - GST - A.P.)]
