Incentives To Investigations: The Changing Tax Landscape Of Post-Sale Discounts

Discounting strategies are well-established commercial practices in the FMCG, automotive, and consumer durable sectors. However, the issue of how such discounts are treated under GST laws is pending before various courts and tribunals at all levels.

The valuation mechanism under GST is entrenched in Section 15 of the Central Goods and Services Tax Act, 2017. As per Section 15(3) of the CGST Act, discounts are excluded from the taxable value of supply, subject to satisfaction of certain conditions. Discounts can be provided to customers either by recording the same in the invoice or through the issuance of credit notes to adjust and reduce the taxable value and tax amount of a previously issued tax invoice that reflected a higher amount. Discount (both pre-sale and post-sale) are deductible from the value of the supply and hence a question arises as to whether post-sale discounts can be offered to customers by reducing the value of fresh supplies.

Revenue Authorities typically take a view that the distributor first extends discounts to retailers, and the company subsequently provides sales discounts to the distributor in later supplies based on those discounts—details of which are duly recorded in the company’s Distributor Management System. In essence, the Revenue Authorities allege that the company reduces the value of current supplies to pass on discounts related to earlier transactions.

Many companies are under scrutiny over how discounts are passed on to their distributors. Under Section 15(1) of the CGST Act, GST is levied on the transaction value—the actual price paid or payable—provided the parties are unrelated and price is the sole consideration. As per Section 15(3), both pre-sale and post-sale discounts can be deducted from the taxable value if conditions are met. Post-sale discounts require a credit note issued within the prescribed timeframe to adjust the output GST liability. Therefore, a business should ideally have the flexibility to implement discount schemes that align with its business needs.

Discounting practices of various industries have been subjected to inquiries by the Revenue Authorities:

• FMCG Sector: Many FMCG companies have been subject to past inquiries related to the application of GST on certain products, particularly where the rate of tax varies from one product to another. ​

• Automotive And Consumer Durables: Industries that commonly rely on dealer incentives and promotional discounts are now grappling with ambiguity over how these practices are treated under GST laws.​

The core concern is due to the lack of clarity on whether post-sale discounts should be considered a component of the transaction value or categorized as separate services, each entailing varied GST treatment.​

The increased focus on post-sale discounts may force businesses to rethink their sales and distribution strategies. Many companies rely on incentive-driven pricing, offering discounts to distributors upon meeting sales targets to promote bulk buying and faster market outreach. Should GST apply to post-sale discounts, businesses might be forced to adjust their strategies, which could lead to increased costs and diminished profit margins. This change could also influence how products are priced for consumers.

If the GST treatment of post-sale discounts is altered, the legal consequences for companies could be substantial. The potential for heavy tax penalties or audits due to non-compliance would increase the financial uncertainty that businesses are already facing amid the geopolitical tensions. Additionally, companies that have issued discounts assuming they were not taxable may struggle to amend past filings and recover Input Tax Credit. This could create both operational and financial hurdles for businesses across various sectors.

In today’s competitive market, multiple discount schemes play a crucial role in driving sales and enhancing customer engagement. These schemes—ranging from trade discounts to performance-based or volume-linked incentives—enable businesses to attract new buyers, reward loyal partners, and respond swiftly to market dynamics. Flexibility in offering structured discounts allows companies to tailor their pricing strategies, manage inventory effectively, and boost overall revenue. For many industries, especially those with extensive distribution networks, such discount mechanisms are not merely promotional tools but integral components of their sales and growth strategies.

One possible approach is that if the discount is duly recorded in the invoice issued in respect of a supply, then such discount should not be included in the value of supply on which tax is payable. Similarly, post-sale discounts should not attract GST if agreed upon at or before supply, linked to specific invoices, and the recipient reverses the corresponding ITC based on the supplier’s documentation. ​Although industries offer a mix of pre and post-sale discounts, having a well-defined discount policy can help prevent litigation with GST authorities.

There is an urgent need for clarity on how pre and post-sale discounts should be taxed under GST laws. As industries await clearer guidance, companies should exercise caution in structuring their discount strategies to ensure compliance and mitigate potential tax liabilities. In the meantime, it is possible that the GST Council may issue specific clarifications regarding the treatment of discounts.

Brijesh Kothary is partner at Khaitan & Co.

Saundarya Sinha is associate at Khaitan & Co.

Disclaimer: The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.