GST on Discounts, Advances and Sales Promotion Schemes

GST on Discounts 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.

Three of the twelve turnover reconciling items are commercial arrangements rather than accounting differences — discounts, advances and promotion schemes. Each has a rule that turns on a document, and one of them is about to change.

"The Finance Act, 2026 has introduced an amendment to substitute Section 15(3)(b) of the CGST Act, significantly simplifying the treatment of post-supply discounts." But: "The enforcement date for the Finance Act, 2026 amendment to Section 15(3)(b) has not yet been notified. Until officially notified and made effective, the pre-amended provision… continues to remain operative."

Discounts: the amendment, and what still applies

Under the amended section 15(3), the value of supply excludes a discount given:

• "before or at the time of supply, if such discount has been duly recorded in the invoice issued in respect of such supply"; and
• "after supply, if a valid credit note has been issued under Section 34 of the CGST Act and the input tax credit attributable to the discount has been reversed by the recipient."

"The amended provision completely removes the earlier requirements of establishing a pre-existing agreement and linking the post-supply discount to specific invoices. The deductibility of a post-supply discount is now contingent solely on the issuance of a credit note under Section 34 and the corresponding ITC reversal by the recipient, making compliance considerably simpler for trade discount schemes, volume-linked rebates and year-end settlement arrangements."

And then the operative-law note, which the Handbook states in terms: the amendment is not yet notified, so "Auditors must therefore apply the pre-amended provision for all periods prior to the notified date of the amendment" — that is, the discount must still be "in terms of an agreement entered into at or before the time of such supply", specifically linked to relevant invoices, and reversed by the recipient.

This matters for exactly the schemes the amendment was written to help. A year-end volume rebate agreed after the year began fails the pre-existing-agreement test today, and will not once the amendment is notified — so the audit conclusion depends on which side of the notification date the supply falls. Check the notification status before relying on the simplified test.

Advances: four kinds, two answers

Security deposits. "These are utilised by the supplier only on occurrence of a contingent event… Generally, such deposits are not taxed under GST. However, in case of happening of the contingent event and consequent adjustment of security deposits, the same shall be taxable."

Retention money. "the sum of money (generally a percentage of the contract value) held back by the customer as a safeguard for any defective or non-conforming work… the contractor is required to discharge his GST liability on the whole invoice value, which also includes retention money."

Advances for materials to be supplied. "These are not subject to GST liability at the time of receipt of the advance."

Advances for services to be rendered in future. "Any advance received for services to be rendered in future, is liable to GST on the date of receipt."

The split is between goods and services, and it follows from the notification that removed the advance-tax requirement for goods. Retention money is not really an advance at all — it is unpaid consideration on an invoice already raised, which is why the full invoice value is taxed regardless of what was collected.

Free samples against buy-one-get-one

Free samples and gifts. "These free samples or gifts, which are supplied free of cost, are not treated as a supply under GST when made without consideration to unrelated persons. However, in terms of Section 17(5)(h)… the input tax credit availed on the inward supply of these items cannot be claimed and must be reversed."

Buy one get one. "As clarified vide Circular No. 92/11/2019-GST, this is not a free supply of an individual item but rather a supply of two or more goods for a single combined price. Its taxability is determined based on whether it satisfies the criteria of a Composite Supply or a Mixed Supply under Section 8, and no reversal of ITC is required on the inputs used."

The two are opposites and are constantly confused. A free sample: no output tax, credit reversed. A BOGO: output tax on the combined price, credit intact. The Handbook's action point warns about the error in both directions — check that sample credit was reversed, "while ensuring that the entity has not mistakenly reversed any eligible ITC" on BOGO stock.

And the test is the invoice. "the auditor should review the invoicing pattern to ensure the combined transaction value is appropriately taxed under composite/mixed supply rules."

Reimbursements

"Some entities seek reimbursement of expenses incurred (at actuals) for supply of services, by raising a debit note and not charging GST on the same. This is an incorrect practice. The logic that there is no element of profit and the expenses are backed by proper supporting documents, does not make the claim free from the applicability of GST."

The exception is statutory payments made on the client's behalf: "in case of audit firms, out of pocket expenses like travelling/ conveyance incurred and claimed are liable to GST, whereas reimbursement sought for payment to MCA towards filing fees, will not be subject to GST."

Generalised: "all reimbursement will attract GST unless the reimbursement is on account of pure agents as defined in Rule 33 of CGST Rules."

The distinguishing feature is who the payment was owed by. The MCA fee is the client's statutory liability, paid by the firm as agent; the travel cost is the firm's own cost of rendering its service, and recovering it is part of the consideration.

Key takeaways

• The Finance Act, 2026 substitutes section 15(3)(b), dropping the pre-existing agreement and invoice-linking requirements.
• It is not yet notified — until then the pre-amended, stricter test applies.
• Under either version, a post-supply discount needs a section 34 credit note and ITC reversal by the recipient.
• Security deposits are untaxed until the contingent event adjusts them.
• Retention money is taxed on the full invoice value, not on what was collected.
• Advances for goods are not taxed on receipt; advances for services are.
• Free samples: no supply, but credit reversed under section 17(5)(h).
• Buy one get one: taxed as a composite or mixed supply under section 8 per Circular 92/11/2019-GST, with no credit reversal.
• Reimbursements are taxable unless the recovery satisfies the pure agent conditions in rule 33.

Read next

• Reconciling Book Turnover with GST Returns
• Expense-Side GST Review: RCM, Blocked Credit and ISD
• Section 18(6): Disposal of Capital Goods on Which ITC Was Taken

Disclaimer: Positions stated as on 5 September 2026, based on sections 8, 15, 17(5) and 34 of the CGST Act, 2017, rule 33 of the CGST Rules, 2017, Circular No. 92/11/2019-GST and the Finance Act, 2026 (amendment to section 15(3)(b) not notified as at the date of this note), as reproduced in the ICAI Handbook on Finalisation of Accounts with GST Perspective (Second Edition, June 2026). Verify the notification status of the section 15(3)(b) amendment before relying on the simplified test.