Secondary Discounts Under GST: Industry Impact And Parity In Tax Treatment- Part II

In Part I of the Article, we discussed the statutory framework governing post-sale (secondary) discounts and credit notes under the GST regime, especially the requirements of Section 15(3)(b) of the Central Goods and Services Tax Act, 2017 (Act) which proved difficult to reconcile with commercial practices, particularly in industries where discounts were determined after supply due to factors such as sales performance, market conditions or promotional schemes. We also examined the legal ambiguities that existed prior to the recommendations of the 56^th GST Council Meeting, including in relation to valuation, Input Tax Credit (ITC) reversal, and the distinction between trade discounts and consideration for services.

This article analyses the manner in which secondary discounts are passed on, especially in industries operating through multi-tier distribution networks involving manufacturers, authorised dealers/wholesalers and sub-dealers/retailers, and the emerging trend of Department scrutiny and litigation.

Recognising industry concerns, the GST Council, in its 56^th Meeting held on 03.09.2025, recommended significant changes to the treatment of secondary discounts pursuant to which legislative amendments and Circular No. 251/08/2025-GST dated 12.09.2025 were issued. These sought to provide greater certainty regarding dealer incentive arrangements, secondary discounts and promotional schemes.

The 2025 amendments and clarifications attempt to rationalise the treatment of secondary discounts under GST to address difficulties in operationalizing secondary discount structures. The amendments sought to align the statutory framework with prevailing practices, particularly in industries operating through multi-tier distribution networks. The amendments were:

1. The requirement that post-supply discounts must be established through a prior agreement was omitted. Businesses are no longer be required to demonstrate pre-existing contractual arrangements for availing GST benefit on post-sale discounts.
2. Amendment to Section 15(3)(b)(ii) of the Act to recognize credit notes as a mechanism for passing on post-sale discounts, subject to reversal of corresponding ITC by the recipient.
3. Corresponding amendment to Section 34 of the Act to permit reduction of output tax in cases of post-sale discounts.

These amendments aligned valuation provisions with business practices and removed procedural rigidities that previously resulted in denial of tax benefits.

CBIC revisited the issue through Circular No. 251/08/2025-GST dated 12.09.2025 to bring greater certainty regarding post-sale discounts and dealer incentive schemes. The Circular attempted to balance commercial realities with tax administration concerns by providing clarifications on the following:

1. No ITC reversal for secondary discounts extended through financial/commercial credit notes, reiterating the position earlier adopted vide Circular No. 105/24/2019-GST dated 28.06.2019 (withdrawn in October 2019).
2. Clarification on dealer-manufacturer-end customer transactions by stating that discounts passed from manufacturers to dealers operating on a principal-to-principal basis merely represent commercial price adjustments and are not linked to any independent activity undertaken by the dealer, hence such discount cannot be included in consideration. However, when there is an agreement between the manufacturer and end customer requiring the dealer to sell goods at a lower price, the secondary discount will be added as part of the consideration between the manufacturer and the dealer.
3. Distinction between discount and consideration for services has been made by clarifying that secondary discounts cannot automatically be treated as consideration for a separate supply. However, where dealers undertake specific promotional activities such as advertisement campaigns, brand promotion or sales drives under an agreement and receive identifiable consideration for such activities, GST would be leviable on such promotional services.

Industry impact

The legislative changes and CBIC clarifications have impacted several industries. While Circular No. 251/08/2025-GST attempts to distinguish promotional arrangements from commercial discounts, such transactions have attracted scrutiny from tax authorities.

In several arrangements, the manufacturer may treat promotional activity as a mechanism to pass on discounts, with the understanding that there is some marketing/promotional activity inherent in the activity or conduct of the retailer.

However, in light of the Circular, authorities may now scrutinize whether there is an independent supply of promotional or marketing service, pursuant to contractual obligations, and whether such supply has a nexus with consideration. Where the underlying transaction reflects a sales incentive rather than consideration for an independent service, the Department may contend that the arrangement is merely a method of passing on secondary discounts and question the eligibility to credit. Such scrutiny is likely to increase, particularly in industries where retailers are compensated through marketing support fees for target incentives or reimbursement structures linked to sales volume. While a pre-existing agreement is no longer necessary as per Section 15(3)(b) of the Act, Revenue may insist on agreements and such other proofs, for establishing that the transaction is in the nature of promotional/marketing activity.

Disputes arise in multi-tiered arrangements where there is no contractual obligation, deliverable or identifiable promotional activity undertaken by the retailer/reseller due to lack of privity of contract with the manufacturer as contracts are generally entered into only with the wholesaler/distributor. Consequently, the Department may question whether the service arrangement possesses independent commercial substance or merely disguises a post-sale discount as consideration for a taxable supply of services.

Notably, taxpayers facing this situation have resorted to justifying invoices for supply of services by taking refuge under Entry 5(e) of Schedule II of the Act, characterizing the retailer/reseller’s passing-on of a discount as an obligation to do an act, refraining from selling goods with profitable margins, or tolerating the act of bearing loss, for which the manufacturer pays consideration.

On the flip side of the coin, where manufacturers have historically treated post-sale discounts as commercial arrangements and have been issuing financial/commercial credit notes, Revenue may take the stand that the activity of the retailer/reseller indeed qualifies as a distinct supply of marketing/promotional services, as was the case in Tvl. Shivam Steels v. Assistant Commissioner (ST)(FAC), Hosur South-III, 2024 (89) G.S.T.L. 40 (Mad.).

Another interesting scenario that may arise is in cases where manufacturers had treated both wholesalers and retailers as providers of promotional/marketing services, in light of the recent amendments, some manufacturers may choose to restructure transactions by issuing GST/financial credit notes going forward, with a view to mitigate litigation risk. However, such restructuring may itself invite scrutiny for the past periods on account of the departure from the established business model. Further, since the manufacturers do not have privity of contract or a direct supply relationship with retailers, they are unable to issue GST credit notes to the retailers. Consequently, the manufacturers are required to follow the existing mechanism for supply of promotional/marketing services with retailers, resulting in an absence of parity in treatment between wholesalers and retailers, which may lead to additional risk.

Conclusion

The 2025 circular and amendments represent a significant shift in GST jurisprudence relating to post-sale or secondary discounts. The reforms acknowledge long-standing industry concerns, reduce procedural complexities and bring greater certainty in valuation as well as ITC treatment.

Prior to these developments, industries were often placed in a position of uncertainty while determining whether dealer incentives and secondary discounts ought to be treated as mere financial/commercial discounts or as consideration for an independent taxable supply of promotional or marketing services. Such divergent positions led to inconsistent tax treatment, disputes concerning valuation and taxability, and consequential issues relating to eligibility of ITC.

However, while the clarifications and amendments are welcome for rationalization and ease of doing business, taxpayers may face the burden of Revenue alleging adoption of the incorrect mechanism/characterisation during the period when such divergence was due to ambiguity in law and industry.

Accordingly, while the amendments and clarifications provide greater clarity between different forms of commercial adjustments while preserving the integrity of the ITC mechanism, businesses are required to carefully structure dealer and reseller arrangements to avoid disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.