Discount explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A manufacturer pays a dealer ₹5 lakh at year end. Depending on what the arrangement says, that payment is:
- a discount reducing the value of past supplies;
- consideration for a service the dealer supplied, taxable at 18%; or
- a financial credit note with no GST consequence for either party.
Three treatments, three sets of paperwork, three different audit outcomes. The classification is not decided by what the payment is called.
A discount reduces the value of the supplier's own supply, under s.15(3). An incentive for doing something — displaying stock, running a campaign, meeting a service standard — is consideration for a supply by the dealer, taxable at 18% with the dealer invoicing the manufacturer. A purely volume-linked rebate that fails s.15(3)(b) reduces nothing, and the supplier issues a financial credit note with no ITC reversal by either side.
Route one: a discount under section 15(3)
Pre-supply discount, s.15(3)(a). Given before or at the time of supply and duly recorded in the invoice. Straightforward — the invoice value is already net.
Post-supply discount, s.15(3)(b). Under the current test, the discount must be established by an agreement entered into at or before the time of supply, specifically linked to relevant invoices, and the recipient must reverse the attributable ITC.
The Finance Act, 2026 substitutes the clause to require only a credit note and the recipient's reversal, dropping the pre-agreement and linkage conditions — awaiting notification. Post-supply discounts under the new s.15(3)(b) →
Where it qualifies: tax credit note under s.34, value reduced, supplier's liability reduced, recipient reverses credit.
Route two: consideration for a service
This is the route businesses most often fail to see.
Where the payment is made in return for the dealer doing something — beyond simply buying more — the dealer has made a supply. Common examples:
- shelf space, display or shop-in-shop arrangements;
- co-branded advertising or a joint campaign;
- exclusive dealing commitments;
- service standards — minimum staffing, demo facilities, after-sales support;
- market intelligence or reporting obligations.
Where these exist, the dealer must raise a tax invoice on the manufacturer at 18%, and the manufacturer takes credit subject to s.16 and s.17.
The tell is in the agreement. If the dealer has to do something to earn the payment, there is a supply. If the dealer only has to buy something, there generally is not.
Route three: a financial credit note
Where the payment is purely volume-linked but fails the s.15(3)(b) conditions — no pre-supply agreement, or no invoice-level linkage — it does not reduce the value of the original supply.
Circular No. 92/11/2019-GST addressed the consequence: the supplier may issue a financial or commercial credit note, and is not required to reverse the ITC attributable to it. The recipient likewise reverses nothing.
So:
- the supplier's output tax stays on the original value;
- the recipient's credit stays on the original value;
- the payment is a commercial settlement outside GST.
That is a stable, defensible outcome — provided the document is clearly a financial credit note and not dressed up as a tax credit note. Free samples and promotional goods →
The decision table
| Arrangement | Treatment | Document |
|---|---|---|
| Discount on the invoice | Value reduced, s.15(3)(a) | Invoice net of discount |
| Rebate agreed pre-supply, linked to invoices, recipient reverses | Value reduced, s.15(3)(b) | Tax credit note, s.34 |
| Rebate agreed after supply, no linkage | No value reduction, no reversal | Financial credit note |
| Payment for display, advertising, exclusivity, service standards | Dealer's taxable supply at 18% | Dealer's tax invoice |
| Payment computed on volume with an activity condition attached | Mixed — usually a supply by the dealer | Dealer's tax invoice |
| Free goods with a purchase | See the promotional schemes analysis | Depends on structure |
The row that causes most disputes
The fifth one — a payment described as a volume rebate but with performance conditions attached.
"You will receive ₹5 lakh on achieving purchases of ₹5 crore, provided you maintain a dedicated display and two trained staff."
That is not a pure volume rebate. The dealer had obligations. Departments treat this as consideration for a service, and the manufacturer's failure to obtain a dealer invoice results in a demand on the dealer with a matching credit denial risk for the manufacturer.
The fix is structural: either remove the activity conditions and treat it as a rebate, or accept it is a service and put invoicing in place.
Practical notes
- Write scheme circulars carefully. The circular issued to the dealer network is the primary evidence of what was agreed and when.
- Separate the two limbs where a scheme has both a volume element and an activity element — price the activity element and have it invoiced.
- Issue the right document. A tax credit note where a financial credit note was appropriate creates an unnecessary output tax reduction that will be reversed with interest.
- Track the recipient's reversal where s.15(3)(b) is relied on — the supplier's reduction depends on it.
- Reassess after the s.15(3)(b) amendment is notified, since the pre-agreement condition falls away.
Key takeaways
- Discount — reduces value under s.15(3); needs a tax credit note and the recipient's reversal.
- Incentive for an activity — the dealer makes a taxable supply at 18% and must invoice.
- Volume rebate failing s.15(3)(b) — financial credit note, no value reduction, no reversal.
- The test is whether the dealer had to do something or only to buy something.
- Schemes with both limbs must be split.
- Circular No. 92/11/2019-GST confirms no reversal on secondary discounts.
Read next
- Post-Supply Discounts Under the New Section 15(3)(b)
- Free Samples, Buy-One-Get-One and Promotional Goods
- Discounts Under GST: When They Reduce Taxable Value
- Debit Note and Credit Note Under GST
Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I (2026 edition) and Circular No. 92/11/2019-GST.