Legislative Amendments on Discount Schemes and Credit Notes– Time to Revisit the Promotional Schemes?

Discounts serve as a powerful strategic tool to stimulate sales, attract new customers and strengthen a brand’s competitive edge in price-sensitive market. Due to this reason, discount schemes have enjoyed favourable tax treatment right from the pre-GST regime. 
 

Under the GST framework, Section 15(3) of CGST Act specifically allows deduction of eligible post sale discounts from the value of supply for tax purposes, subject to prescribed conditions, notably that the discount was known and agreed upon before or at the time of supply and linked to the relevant tax invoice. This pre-condition, however, has often proved to be a significant compliance hurdle in real-world commercial practices, due to its inconsistency with commercial realities and extensive documentation requirements. Thus, industry stakeholders have been advocating for the removal of such requirements. Pursuant to such representations, the Government proposed the following amendments to the discount schemes in 56th GST Council Meeting- 
 

• Omit the requirement of linkage of discounts with the agreements and invoices 
   
• Cross reference of Section 15(3)(b) in Section 34 and vice-versa 
   

The intent behind this proposal was to omit the pre-agreement requirement and instead allow post-sale discounts to be recognised through issuance of GST credit notes under Section 34 of the CGST Act, subject to the only condition that corresponding Input Tax Credit (ITC) is reversed by the recipient. 
 

Budget 2026 has enacted the 56th GST Council’s changes by substituting Section 15(3)(b), effective upon Gazette notification. It is imperative to examine the substance and impact of this amendment, the uncertainty it has generated, and why it serves as a wake-up call for businesses to recalibrate their discount schemes.
 

While cross referencing of Section 34 and Section 15(3)(b) and vice versa seems to be a clarificatory amendment specifically allowing issuance of GST credit notes in case of post supply discounts, the omission of requirement of discount schemes with the agreement and linkage with relevant invoices in the amended Section 15(3)(b) seems to be a bigger relief for the taxpayers. 
 

A perusal of amended provision indicates that the taxpayers are no longer required to have a discount policy in place to qualify for GST reduction and the discounts can be passed on without any pre-agreed terms as well, as long as ITC is reversed by recipient. 
 

One thing which is very clear is that since the discounts now depend solely on ITC reversals, suppliers will need to rely heavily on IMS to monitor, track and ensure those reversals. Additionally, they may still continue to obtain certificates from recipient, reassuring the reversals, even though there is no statutory requirement or any instruction to do so, to help during the audits.
 

It is worth noticing that neither the term ‘discount’ has been deleted from the relevant provision, nor has the same been defined. Thus, one will have to see that while businesses no longer need to establish the discount upfront, whether the concept of what constitutes a discount continues to be relevant in GST regime, particularly amidst the settled law on meaning of the term “discounts” in pre-GST era which necessitated the requirement of having pre-agreed arrangements to qualify a discount as a deduction from sale price [Bombay Tyres International Private Limited, 1984 (17) E.L.T. 329 (SC), Madras Rubber Factory Ltd., 1995 (77) E.L.T. 433 (SC)]. 
 

If the objective behind the amendment was to eliminate the need for pre-agreed arrangements, then whether the earlier clarifications issued in Circular 251 distinguishing discounts from services and third-party consideration would become irrelevant, since those were based on existence of pre-agreed discount arrangements or those clarifications will now be restricted only to past transactions remains to be seen.
 

Will this amendment mean that any reduction in value by supplier to the recipient on account of reduction in price would be considered as discounts? Can unannounced schemes such as surprise discounts, stock liquidation discounts be covered under the amended provision? Whatever the objective behind the amendment is, the amended Section 15(3)(b) may indeed offer flexibility to the taxpayers in adopting such position.
 

Another issue worth analysing is whether this amended provision applied to self-invoice cases since the provision specifically uses the term, ‘credit notes issued by supplier’? One may argue that reading the provision contextually and harmoniously, self-issued credit notes should also be covered under the said provision. However, in absence of any clarification, adopting such position may be contentious. 
 

By and large, this amendment has been welcomed and appreciated by the taxpayers as it would improve ease of operations, specifically for businesses in discount-heavy sectors like FMCG, automobiles, and cement and would align GST treatment with commercial norms. What has become evident, however, is that this is an opportune moment for industry players to re-evaluate their discount schemes to ensure they are aligned with updated provisions and are compliant with the law. 

[The author is an Associate Partner in Goods & Services Tax practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]