How Discounts Are Treated Under GST

Short answer: Under Section 15(3) of the CGST Act, 2017, a discount shown on the invoice at the time of supply is excluded from the taxable value, so GST is charged only on the discounted price. A discount given after the sale reduces the taxable value only if it was agreed in advance (before or at the time of supply), linked to specific invoices, and the buyer reverses the matching input tax credit. Otherwise GST stays on the full invoice value.

What types of discounts are there under GST?

There are two: discounts before or at the time of supply, and discounts after supply.

Type	Example	Reduces GST value?
On-invoice discount	10% trade discount printed on the bill	Yes
Post-sale, agreed in advance and linked to invoices	Year-end volume rebate under a written agreement	Yes, through a credit note
Post-sale, not agreed in advance	Ad-hoc "goodwill" discount after the sale	No, treat as a financial credit note
Cash discount for early payment	2% off if paid in 7 days	Only if agreed in advance and recorded on or linked to the invoice

How do post-sale discounts work?

The supplier issues a GST credit note under Section 34, and the buyer reverses the matching ITC. The supplier reports the credit note in GSTR-1 and reduces output tax in GSTR-3B. Credit notes for a financial year must be declared by 30 November of the next year, or the annual return date, whichever is earlier.

A "financial" or "commercial" credit note (without GST) can still be issued for discounts that do not meet Section 15(3). It reduces the amount the buyer pays, but not the GST already charged.

Worked example

A Bengaluru distributor sells goods worth ₹10,00,000 plus 18% GST to a retailer in April. Their written agreement says the retailer gets a 5% rebate if purchases for the quarter exceed ₹25 lakh.

• By June, purchases reach ₹30 lakh across several invoices.
• The distributor issues a GST credit note for ₹1,50,000 plus ₹27,000 GST, listing the invoices.
• The retailer reverses ₹27,000 ITC.
• The distributor reduces its output tax by ₹27,000.

If there had been no prior agreement, the distributor could only issue a financial credit note for ₹1,50,000, and the GST would stay as charged.

What about free goods and "buy one get one"?

Free goods given with a sale are usually treated as part of one supply at a single price, so no separate GST applies on the free item. Truly free gifts not linked to a sale are handled differently; see our guide on GST on free samples and gifts.

Common mistakes

1. Reducing GST on ad-hoc discounts not agreed in advance.
2. Credit notes not linked to specific invoices.
3. Missing the 30 November deadline for credit notes.
4. Buyer failing to reverse ITC, leading to notices on both sides.
5. No written discount policy or agreement.

How SP & SC helps

We review your discount schemes and distributor agreements, design compliant credit note workflows, and report them correctly in GSTR-1 and GSTR-3B. See our GST return filing service.

Frequently asked questions

Is GST charged on the price before or after discount?

After, if the discount is shown on the invoice.

Can I reduce GST on a discount given after the sale?

Only if it was agreed in advance, linked to invoices, and the buyer reverses the ITC.

What is a financial credit note?

A credit note without GST, used for discounts that do not meet Section 15(3).

Is there a deadline for GST credit notes?

30 November after the end of the financial year, or the annual return date if earlier.

Get a fixed-fee quote

Every situation is different, so we do not publish a one-size price. Share your documents with us and a named advisor will send a written, fixed-fee quote before any work starts. Contact SP & SC or message us on WhatsApp at +91 90356 74566. Whatever the problem you bring, we handle it end to end.