Legislative Evolution Of Secondary Discounts Under GST - Part-I

Manufacturers in industries such as automobile, FMCG, pharmaceuticals, electronics and consumer durables, commonly adopt post-sale (secondary) discount mechanisms to incentivize dealers, liquidate inventory and improve market competitiveness. Secondary discounts are those which are passed on after the initial supply is completed and would not be known/anticipated at the time of supply, which are also used for promoting sale prices during festivals and other occasions.

Despite its widespread commercial use, secondary discounts have given rise to several interpretational issues under the GST regime. Questions arose regarding valuation, reversal of Input Tax Credit (ITC), the characterisation of discounts, and the appropriate manner of passing on such benefits through the supply chain. The Central Board of Indirect Taxes and Customs (CBIC) issued Circulars clarifying the Goods and Services Tax (GST) implications of secondary discounts and related promotional arrangements to address such concerns.

This article is divided into two parts to examine the evolving GST treatment of post-sale/ secondary discounts and the impact on industry. This part (Part-I) discusses the statutory framework governing secondary discounts and credit notes along with the initial clarifications issued by the CBIC through Circulars focusing on the legal ambiguities that existed prior to the recommendations of the 56^th GST Council Meeting, particularly concerning valuation adjustments, reversal of ITC, and the distinction between trade discounts and consideration for promotional services.

Why secondary discounts were a challenge under GST:

The valuation provisions under Section 15 of the Central Goods and Services Tax Act, 2017 (Act) permitted exclusion of secondary discounts from the value of supply only when two conditions were satisfied:

1. The discount had to be established in terms of an agreement entered into before or at the time of supply and was specifically linked to relevant invoices, and
2. The recipient of the supply reversed the ITC attributable to such discount.

While conceptually straightforward, these requirements often proved difficult to implement in practice as several industries issued year-end incentives, turnover discounts, target-based incentives and secondary discounts after the completion of supply, based on market conditions, which are often without invoice-level linkage - making compliance with the twin conditions prescribed under the Act challenging.

In such cases, manufacturers generally issued financial or commercial credit notes instead of GST credit notes under Section 34 of the Act. Since such financial credit notes did not result in a reduction of the manufacturer’s output tax liability, uncertainty remained regarding whether the recipient was required to reverse the proportionate ITC.

Circular No. 92/11/2019-GST dated 07.03.2019

CBIC initially issued Circular No. 92/11/2019-GST dated 07.03.2019 to clarify that where secondary discounts do not satisfy the conditions prescribed under Section 15(3)(b) of the Act, manufacturers may issue financial or commercial credit notes without adjustment of output tax liability.

This clarification acknowledged the commercial reality that secondary discounts may not always qualify as discount under GST and consequently credit note under Section 34 of the Act cannot be issued in every case. Hence, the output tax liability could not be reduced in cases where the dealers issued financial credit notes.

Although the Circular addressed practical difficulties, uncertainty continued regarding the following:

• Whether recipients were required to reverse ITC in cases where commercial credit notes are issued, as the GST component remained unaltered?
• Whether dealer incentives constituted consideration for a separate supply of services from the dealer to the manufacturer?

To address representations from trade and industry, CBIC issued Circular No. 105/24/2019-GST dated 28.06.2019 specifically dealing with secondary discounts.

The Circular introduced important distinctions regarding dealer incentive arrangements:

However, Circular No. 105/24/2019-GST created concerns due to the possibility of routine trade discounts being treated as consideration for promotional services which could attract GST as separate taxable supplies. Consequently, representations were made before CBIC, following which Circular No. 105/24/2019-GST was withdrawn ab initio vide Circular No. 112/31/2019-GST dated 03.10.2019 which demonstrated the practical difficulties involved in distinguishing between genuine trade discounts and independent promotional services.

Even after the withdrawal, dealer incentive arrangements continued to remain under departmental scrutiny, resulting in litigation and interpretational disputes across industries. The withdrawal of a circular cannot be construed as an automatic acceptance of a view contrary to the clarification contained therein. Rather, it only indicates that the Department no longer intends to be bound by the clarification issued in the circular and may examine each case independently based on its specific facts and circumstances with an option to fall back on the reasoning.

A significant area of concern was the characterization of amounts passed on by manufacturers to dealers or retailers. While taxpayers generally viewed such arrangements as commercial price adjustments or secondary discounts intended to increase sales and market penetration, departmental authorities often examined whether the dealer or retailer had undertaken any additional/independent promotional or marketing activity for the manufacturer. In several cases, disputes arose regarding whether such amounts represented consideration for a taxable supply of services rather than a mere discount linked to the original supply of goods.

The converse situation was also problematic, with Revenue contending that in cases where the discount had been passed on by the recipient raising an invoice for the supply for marketing or promotional activities as being a service rendered to the manufacturer, no actual marketing or promotional activity had been undertaken. Thus, Revenue sought reversal of ITC availed by the manufacturer on such transactions by taking a view that there was no actual provision of service.

Conclusion

Despite the clarifications issued by CBIC, significant uncertainty continued regarding the GST treatment of secondary discounts, particularly where dealer incentives could potentially be characterised either as trade discounts or as consideration for promotional services. Uncertainty regarding ITC reversal in case of issuance of financial or commercial credit notes also remained. These arrangements were also subject to departmental scrutiny, especially in sectors operating through complex multi-tier distribution structures.

The GST Council acknowledged that the existing statutory framework governing post-sale and secondary discounts under Section 15(3)(b) of the Act required substantial rationalization to align with prevailing commercial practices. In several industries operating through multi-tier distribution models, discounts are often determined post supply based on sales targets, market performance, inventory liquidation and promotional schemes, making strict compliance with the pre-existing conditions under Section 15(3)(b) of the Act commercially impractical.

Accordingly, in the 56th GST Council Meeting held on 03.09.2025, significant amendments were proposed with the objective of reducing interpretational disputes, streamlining compliance requirements and bringing greater certainty to valuation and ITC treatment in relation to post-sale and secondary discounts. These legislative changes, along with the subsequent clarifications issued by CBIC, and operational difficulties faced post amendment, are discussed in detail in Part II of the article.

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.