In short
Why this mattered
Most discounts in trade are not known on the day of the sale. A distributor earns 2% if it buys ₹1 crore in the quarter; a retailer gets a season-end rebate on what it actually sold. Until now, section 15(3)(b) of the CGST Act let such a discount reduce the value of supply only if it was established in an agreement made at or before the time of supply, was linked to the relevant invoices, and the buyer had reversed the credit on it.
Each condition caused disputes. Businesses could rarely fix the discount before the sale; invoice-wise linking was impractical for discounts earned on a quarter's purchases (even though credit notes stopped needing invoice links from 1 February 2019); and suppliers had no way to see whether their buyers had actually reversed the credit, so officers questioned the reduction in tax.
The old and the new rule
| Up to 31 October 2026 | From 1 November 2026 | |
|---|---|---|
| When the discount is fixed | In an agreement at or before the supply | Any time, including after the supply |
| Link to invoices | Specifically linked to the relevant invoices | Not required |
| Document | Not clearly specified (credit notes used in practice) | A credit note under section 34 |
| Buyer's credit | Reversed by the recipient on the supplier's document | Reversed by the recipient as section 34 requires |
| Proof of reversal | Circular 212: declaration (tax up to ₹5 lakh) or CA/CMA certificate (above ₹5 lakh) | Circular rescinded; the Invoice Management System shows it |
Section 34 now allows a credit note in five situations instead of four: the value charged was too high, the rate charged was too high, goods were returned, the goods or services were deficient, and, newly, a post-sale discount under section 15(3)(b).
The proviso to section 34, inserted by section 126 of the Finance Act, 2025 and in force from 1 October 2025 (Notification No. 16/2025-Central Tax), still applies: the supplier cannot reduce its output tax for a credit note if the registered recipient has not reversed the attributable credit, or, for an unregistered recipient, if the tax burden was passed on to someone else.
A worked example
Shree Distributors buys detergent from Kaveri Home Care (both registered in Karnataka) during July to September: invoices of ₹50,00,000 plus 18% GST (₹4,50,000 CGST and ₹4,50,000 SGST). Kaveri's scheme, announced in October, gives 2% on quarterly purchases above ₹40 lakh.
Discount: 2% of ₹50,00,000 = ₹1,00,000. GST on it at 18% = ₹18,000 (₹9,000 CGST and ₹9,000 SGST). Kaveri issues a credit note for ₹1,18,000 in November. Before 1 November 2026, this discount would not have reduced the value of supply because it was not agreed before the sales. Now it does, once Shree reverses ₹18,000 of credit.
| Kaveri Home Care (supplier) | Shree Distributors (buyer) | |
|---|---|---|
| Accounts | Discount allowed ₹1,00,000 Dr; output CGST ₹9,000 Dr; output SGST ₹9,000 Dr; Shree ₹1,18,000 Cr | Kaveri ₹1,18,000 Dr; discount received (or purchases) ₹1,00,000 Cr; input CGST ₹9,000 Cr; input SGST ₹9,000 Cr |
| Return | Credit note in GSTR-1 (table 9B); output tax in GSTR-3B lower by ₹18,000 | Accept the credit note in the Invoice Management System; credit in GSTR-3B lower by ₹18,000 |
| Tax effect | Pays ₹18,000 less | Claims ₹18,000 less |
If Shree rejects the credit note or never reverses the ₹18,000, Kaveri cannot reduce its output tax by ₹18,000 under the proviso to section 34, even though it gave the discount. Kaveri bears the GST on ₹1,00,000 it never received.
Discounts that are not post-sale discounts
A discount shown on the invoice itself at the time of sale is covered by section 15(3)(a) and simply lowers the invoice value. A financial credit note (a commercial credit with no GST, often used when the discount isn't meant to reduce tax) remains possible, but it does not reduce the supplier's output tax. And if the buyer must do something in return for the discount, such as advertising or display, it may be a separate supply by the buyer, not a discount.
What to do now
- Issue GST credit notes for post-sale discounts from 1 November 2026, with the discount value and the GST reversed.
- Report them in GSTR-1 and follow up buyers who haven't accepted them in the Invoice Management System.
- Reduce output tax only for credit notes the buyer has accepted.
- Stop collecting Circular 212 declarations and certificates; that circular was rescinded by Circular No. 253/10/2025-GST of 1 October 2025.
- Review schemes that ask buyers to promote your goods: those may need a separate invoice from the buyer.
- Accept genuine credit notes in the Invoice Management System and reverse the credit in the same period.
- Reject credit notes you don't agree with, and tell the supplier why.
- Reconcile credit notes in GSTR-2B with your books each month.
Do discounts given before 1 November 2026 get the new rule?
The amended section applies from 1 November 2026. A discount on supplies, or a credit note, before that date is tested under the old conditions; check with your adviser for discounts that span both periods.
Is there a time limit for the credit note?
Yes. Under section 34(2), a credit note must be declared by 30 November after the end of the financial year of the supply, or before the annual return is filed, whichever is earlier.
Do we still need the discount scheme in writing?
Not for GST. Keep the scheme circular or e-mail anyway: it supports the discount in your books and for income tax.
What if the buyer is unregistered?
There is no credit to reverse. The supplier can reduce its tax only if it has not passed the tax burden on to another person.
Changing how you give discounts?
Aypa can set up credit notes for your schemes and track which buyers have accepted them before you reduce your tax.
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