CBIC clarifies GST rules on post-sale discounts, easing industry litigation risks

In the run-up to the implementation of the new GST rates applicable from 22 September, the Central Board of Indirect Taxes and Customs (CBIC) has issued a key circular clarifying the Goods and Services Tax (GST) treatment of post-sale discounts, bringing long-awaited certainty to one of the most litigated areas of indirect taxation.

The guidance settles disputes around whether trade discounts should be treated as services, whether dealers can continue to claim input tax credit (ITC), and how promotional arrangements must be structured for tax purposes.

What the circular says

Upon being approached by industry, the CBIC has drawn a sharp line between routine trade discounts and promotional services. In transactions where manufacturers and dealers operate on a principal-to-principal basis, discounts passed on to dealers are to be treated as a mere reduction in the value of goods, not as consideration for any independent supply of services.

At the same time, the circular clarifies that issuing purely financial or commercial credit notes will not impact the ITC entitlement of recipients, since the underlying tax liability remains unchanged. This addresses a long-standing compliance uncertainty for dealers who feared losing ITC when suppliers adjusted prices post-sale.

However, GST will be applicable where there is a separate arrangement for promotional activities — such as co-branding, advertising campaigns, or sales drives — and where specific consideration is defined in the agreement.

Industry reactions: Relief coupled with caution

The circular has been welcomed across the board by tax experts who see it as a pragmatic step towards aligning tax administration with commercial practice.

Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said the clarification resolves compliance worries for businesses. “By affirming that input tax credit will remain unaffected when financial or commercial credit notes are issued, it removes a major compliance uncertainty for dealers. The guidance also settles the debate around marketing support, clarifying that post-sale discounts are not taxable as services unless the dealer is contractually bound to perform defined promotional activities.”

Mishra noted that the onus now shifts to businesses to maintain proper documentation of agreements and credit notes, ensuring that customer-level pricing arrangements are transparently captured.

Saurabh Agarwal, Tax Partner at EY, underscored that the distinction between discounts and services is vital. “The circular correctly distinguishes between a genuine trade discount and a separate service. It affirms that where manufacturers and dealers operate on a principal-to-principal basis, discounts provided by the manufacturer to the dealer, intended solely for competitive pricing and sales promotion, are not a consideration for any independent service. This crucial distinction resolves a key pain point and brings the tax treatment in line with commercial practice.”

He added that the affirmation on ITC retention is “a major step towards reducing litigation” and that companies should reassess contracts to ensure promotional activities are clearly ring-fenced.

Abhishek Jain, Partner & National Head, Indirect Tax at KPMG in India, called it a much-needed clarification for industry. “ The clarification will help industry and trade execute such transactions with greater certainty and reduce disputes around what has long been a contentious issue. At the same time, for scenarios involving agreements with end customers for passing on specific benefits to end-consumers through dealers in the supply chain, businesses may need to carefully revisit and evaluate their positions.”

Why it matters

Since the introduction of GST, the tax treatment of post-sale discounts has remained contentious. Disputes often arose when tax officers argued that discounts linked to sales performance or market share amounted to a service rendered by dealers to manufacturers, making them taxable. Similarly, the denial of ITC in cases where credit notes were issued created financial uncertainty for businesses.

By clarifying these aspects, the CBIC aims to bring certainty, reduce litigation, and ensure that tax administration does not disrupt commercial arrangements. Yet, tax practitioners caution that businesses will need to carefully draft and maintain contracts to ensure the benefit of these clarifications, particularly in arrangements involving rebates tied to end-customer pricing or promotional obligations.

The road ahead

The circular marks another step in the government’s broader effort to streamline GST compliance and reduce disputes. While the clarification is expected to ease industry concerns significantly, experts say its effectiveness will depend on consistent interpretation by field officers and rigorous documentation by businesses.

For now, the industry views the move as a pragmatic alignment of tax treatment with market practice — a shift likely to save companies both compliance costs and litigation headaches.