The Central Board of Indirect Taxes and Customs (CBIC) has finally put an end to years of confusion surrounding the GST treatment of post-sale or secondary discounts. Through Circular No. 251/08/2025-GST, issued on 12th September 2025, CBIC has offered comprehensive clarifications that will significantly reduce disputes and ensure uniformity in interpretation across the country.

For long, businesses, tax professionals, and auditors were divided on issues like:

• Whether recipients need to reverse ITC when discounts are passed through credit notes,
• Whether post-sale discounts are taxable as “consideration” for services, and
• How to differentiate a genuine commercial discount from a promotional service payment.

This new Circular, issued on the recommendations of the 56th GST Council meeting, directly addresses these pain points. It also replaces the earlier Circular 105/24/2019-GST (later withdrawn via Circular 112/31/2019-GST), bringing in clarity and consistency.

Understanding Credit Notes: The Core of the Issue

Before diving into the clarifications, it’s important to recall how discounts are adjusted under GST.

• GST Credit Notes (Section 34, CGST Act, 2017):
  These reduce taxable value or GST charged. When issued, the supplier adjusts output tax liability and the recipient must reverse ITC proportionately.
• Non-GST / Financial Credit Notes (Commercial Credit Notes):
  These reduce only the commercial value of supply, not the tax portion. Suppliers do not reduce GST liability, and the recipient continues to enjoy full ITC.

The confusion, in practice, arose when discounts were given through commercial credit notes — should the recipient reverse ITC or not?

Key Clarifications by CBIC

1. ITC Availability on Financial/Commercial Credit Notes

Issue: Should recipients reverse ITC when discounts are given without adjusting GST?

CBIC’s Clarification:
If the discount is passed via a financial/commercial credit note without touching GST charged on the original invoice, the recipient can retain full ITC. No reversal is required.

✅Example:
ABC Electronics sells goods worth ₹1,00,000 + ₹18,000 GST to XYZ Distributors. XYZ claims full ITC of ₹18,000. Later, ABC issues a financial credit note of ₹10,000 (no GST element). XYZ continues to enjoy full ITC of ₹18,000.

Judicial/Advance Ruling Support:

• MRF Ltd. (AAAR – Tamil Nadu)
• Vedmutha Electricals (AAR – Andhra Pradesh)
• Santosh Distributors (AAR – Kerala)
  All confirmed that ITC reversal is not required in such cas

2. Post-Sale Discounts from Manufacturer to Dealer

Two scenarios were clarified:

(a) No Agreement with End Customer

If manufacturer-to-dealer and dealer-to-customer sales are independent (principal-to-principal basis) and discounts are not linked to any services, the discount is just a commercial reduction — no GST is applicable.

✅Example:
PQR Textiles gives LMN Garments a year-end volume discount of ₹25,000 through a commercial credit note. LMN has no extra obligations. Result: No GST on this discount.

Case Law Support:

• Supreme Paradise v. AC (Madras HC) – volume discounts not taxable.
• Tvl. Shivam Steels v. AC (Madras HC) – ITC reversal not required.

(b) Agreement with End Customer (Linked Concessional Supplies)

If manufacturers instruct dealers to supply at concessional rates (say, to government hospitals or institutions), and later reimburse the concession via credit notes — this is treated as consideration for supply and attracts GST.

✅Example:
RST Pharma directs dealers to supply medicines to govt. hospitals at reduced rates and reimburses the difference. This reimbursement is taxable under GST.

3. Discounts Linked to Promotional Schemes

(a) Specific Promotional Activities (with Agreement)

If discounts are tied to promotional obligations like advertising, co-branding, exhibitions, or marketing services, they are treated as consideration for supply of services. The dealer must issue an invoice and charge GST.

✅Example:
DEF Mobiles gives GHI Retail Chain an extra 3% discount for conducting promotional campaigns. GHI must raise an invoice on DEF with GST.

(b) No Formal Agreement for Promotions

Where no obligation exists for promotional services, and the discount is purely for commercial reasons, it remains a simple price reduction — no GST liability arises.

✅Example:
XYZ Electronics gives ABC Distributors a post-sale discount of ₹50,000 for bulk purchases without service conditions. Treated as a pure discount, not consideration.

Conclusion

The CBIC’s Circular 251/08/2025 is a welcome move that settles one of the most debated issues under GST. The key takeaways are:

• No ITC reversal is required for financial/commercial credit notes where GST remains unchanged.
• Pure commercial discounts (volume-based, price reductions) are not taxable.
• Discounts tied to services or promotional activities are taxable as consideration for supply.

With these clarifications, CBIC has aligned legal interpretation with judicial precedents (MRF Ltd., Vedmutha Electricals, Supreme Paradise, Shivam Steels). This ensures consistent application across states, reduces litigation, and gives much-needed certainty to businesses, dealers, and manufacturers.

Reference: [CBIC Circular No. 251/08/2025-GST dated 12.09.2025 – Full Notification Attached]