Namaste!

When you strike a deal and pay GST on your purchase, you might receive a rebate from the seller later. The good news is that, under the GST Regulatory Framework, if the discount is issued as a financial credit note without any GST adjustment, you can retain your input tax credit (ITC). This means a post-sale discount does not require you to reverse your ITC, as long as the process is handled correctly. This understanding should reassure you and give you confidence in your tax management.

Let's explore why this is the case and what recent clarifications through CGST Circular 251/08/2025-GST mean for businesses.

Understanding Post-Sale Discounts and Credit Notes

Post-sale discounts, also known as secondary or retrospective discounts, are price reductions given after the original sale invoice has been issued. For instance, a supplier may offer a year-end rebate or a volume discount through a credit note.

In the context of GST, there are two types of credit notes:

Why is this important?

If the supplier does not reduce their GST liability, the tax on the full original price has already been paid to the Government. This raises the question: Should the buyer still receive the full ITC even though they ultimately paid less for the goods? The answer from GST authorities is yes; the full ITC remains intact.

What the Law and CBIC Clarify

Section 16 of the CGST Act allows a buyer to claim ITC on the GST charged for purchases used in their business. In our case, the purchase invoice reflected the full GST amount (before any discount). Since the supplier issued a financial credit note without reducing the GST, the amount on the invoice remains unchanged. Therefore, technically, the buyer has paid or is liable for the entire GST on that supply.

No legal provision requires the reversal of ITC in this scenario because the conditions outlined in Section 34 for a CGST credit note were not met; thus, there is no alteration in the value or tax recorded in the GST system.

The Central Board of Indirect Taxes and Customs (CBIC) explicitly addressed this issue in 2019 in Circular No. 92/11/2019-GST. They clarified that suppliers may issue financial or commercial credit notes for post-sale discounts not agreed upon at the time of sale. Since these credit notes do not affect the taxable value, the tax charged remains unchanged, and the buyer's ITC is unaffected. In other words, the buyer is not required to reverse the ITC associated with the discount provided through a financial credit note. This support from the CBIC should reassure you that you are on the right track.

This position was reiterated in the recent Circular 251/08/2025-GST, which states:

"...the supplier of goods can issue financial/commercial credit notes… he will not be eligible to reduce his original tax liability… As the transaction value is not allowed to be reduced on account of issuance of financial/ commercial credit note, accordingly, the tax charged from the recipient would also not get reduced. Thus, it is clarified that the recipient will not be required to reverse the Input Tax Credit attributed to the discount provided on the basis of financial/commercial credit notes..."

This clear directive means that if you are the recipient (buyer/dealer) who received a post-sale discount via a financial credit note, you can retain the full ITC you initially claimed. The Government has already collected the tax, so there is no loss of revenue. The CBIC recognised that since the supplier paid the full GST and did not seek any reduction, allowing the buyer to keep the full ITC is fair and does not lead to misuse. This should reinforce your belief in the fairness of the system.

🤔What About the 180-Day Rule (Rule 37)?

A common question arises regarding Rule 37 of the CGST Rules: if a buyer does not pay the supplier within 180 days of the invoice date, they must reverse the ITC for the unpaid amount. In situations involving post-sale discounts, the buyer effectively pays less than the original invoice value due to issuing a credit note. Does Rule 37 consider this a short payment?

From a practical standpoint, when a financial credit note is issued, it represents a mutually agreed price adjustment. Economically, the invoice is considered fully settled after accounting for the credit note. Many tax experts argue that accepting a financial credit note does not qualify as "failure to pay" but is part of the revised transaction agreement.

Importantly, the Government does not lose any GST revenue—the supplier has paid the full tax, and the buyer is now paying the net amount to the supplier.

Although Circular 251 does not mention Rule 37, it indicates that no ITC reversal is necessary, suggesting that these credit notes should not trigger the 180-day reversal requirement. This interpretation aligns with the principle of fairness: since the Government's tax remains intact, ITC should not be retracted due to a commercial adjustment.

It's important to note that if a tax officer reviews Rule 37 strictly, they may argue for a reversal because the full "invoice amount" was not paid in cash. However, with the clarification provided by the CBIC, businesses have a strong basis to contest any such demand, as the circular is binding on officers.

Upcoming Change – Formalising the Process (Amendment in Pipeline)

Relief is on the way to eliminate any lingering ambiguity. In its 56th meeting in September 2025, the GST Council recommended amending the law to simplify procedures. The proposal includes amending Section 15(3)(b)(i) to remove the requirement that discounts must be agreed upon before the sale. Instead, it will allow for post-sale discounts through a Section 34 credit note, provided the corresponding ITC is reversed by the recipient.

Additionally, Section 34 will be updated to explicitly cover post-sale discount credit notes and require the buyer to reverse their ITC when the value is reduced. The revised law aims to align with current industry practices, which involve using credit notes for after-the-fact discounts. The new rule will ensure that if the supplier claims a tax reduction, the buyer must forfeit the ITC on the tax portion of that discount.

What does this mean? In the future, suppliers can legitimately issue a GST credit note for these discounts, thereby reducing their output tax. Concurrently, buyers will proportionally reverse their ITC. This change will formalise the process and eliminate the need for "financial credit notes" as a workaround. It creates a win-win situation: compliance will be more apparent, and everyone will adhere to a consistent rule.

Until this amendment is enacted, Circular 251/2025 will be the guiding authority. For any post-sale discounts not agreed upon during the original sale, continue using financial credit notes to ensure your ITC remains secure. The Government's clarification on this matter is unequivocal.

Bottom Line

If you receive a post-sale discount through a credit note that does not include GST, do not reduce your ITC. The supplier has already paid GST based on the full original price, and you are entitled to claim the full GST credit. You do not need to reverse any GST for these discounts, a detail clarified in the latest circular.

For suppliers, please note that you cannot reduce your tax liability for these discounts under current law unless it was pre-agreed and meet the criteria outlined in Section 15(3)(b). When you issue a financial or commercial credit note, it is simply a commercial adjustment. The advantage of this approach is that your dealers will not lose their ITC, which helps keep them satisfied and compliant.

Next Steps

Unsure how to treat a particular discount or credit note in GST returns? Don't let confusion cost you credit. Contact GST DOST for personalised guidance. We'll help ensure your post-sale incentives are structured in a tax-compliant manner that maximises benefits for both you and your business partners. Stay informed, stay compliant – and leverage those legitimate discounts to grow your sales!