Credit note for discounts

Last reviewed: October 2026

When the discount was agreed decides the GST

GST is charged on the transaction value, and section 15(3) of the CGST Act lets discounts come off that value in two cases only. A discount given before or at the time of supply comes off if it is shown on the invoice. A discount given after the supply comes off only if all three of these hold:

1. it is established in an agreement entered into at or before the time of supply;
2. it is specifically linked to the relevant invoices; and
3. the input tax credit attributable to it has been reversed by the recipient.

The general rules for any credit note (fields, numbering, GSTR-1 tables, the 30 November time limit) are on the credit note page; this page covers only what changes for discounts.

How to make a credit note for a discount

1. Seller and buyerEnter both businesses with their GSTINs exactly as on the invoices being discounted; they decide IGST or CGST + SGST.
2. One line for the discountDescribe the discount (rate, period, scheme) and enter its taxable amount as the price. For price protection or a cash discount, put the units or the invoice in the description.
3. Tax or no taxFor a discount agreed before the sale and reversed by the buyer, use the invoices' GST rate. For a commercial credit note, set the rate to 0% and say "without GST" in the notes.
4. Invoices and agreementIn the notes, list the invoices the discount relates to and the date of the scheme letter or agreement. In the terms, ask the buyer to accept the credit note in IMS.
5. Sign in to issueSigning in numbers the credit note in your CN series, posts the discount and any tax reversal, and lines it up for GSTR-1. Issuing and sending need the Sales module.

Example: a quarterly volume discount to a distributor

Cauvery Kitchen Appliances in Coimbatore gives its Bengaluru distributor, Malnad Distributors, 3% off a quarter's purchases once they exceed ₹15 lakh. The scheme letter was signed on 1 April 2026, before any of the supplies. In July to September Malnad bought ₹18,40,000 of mixer grinders (before GST) on 14 invoices, so at quarter end Cauvery issues one credit note for ₹55,200 plus IGST, with an annexure listing each invoice and its share of the discount.

1. The invoices the discount relates to: section 15(3)(b) needs the discount linked to specific invoices.
2. The agreement made before the supplies: the scheme letter and its date.
3. How the discount was earned: rate, target and period.
4. HSN of the goods discounted, so the tax rate can be checked against the invoices.
5. IGST at the invoice rate (18%), because the original sales were inter-state.
6. Annexure and IMS: the invoice-wise split, and the request to accept the credit note.

One credit note may cover several invoices of the same financial year, so a quarterly or annual scheme does not need one credit note per invoice. If the period crosses 31 March, issue one credit note per financial year.

Proving the buyer reversed its input tax credit

A tax credit note for a discount is two-sided: your output tax falls only if the buyer's input tax credit falls by the same amount. Two rules require this, and you need evidence for both.

• Section 15(3)(b)(ii): the discount is excluded from value only if the recipient has reversed the attributable credit. CBIC Circular 212/6/2024-GST (26 June 2024) accepts as evidence a certificate from the recipient's chartered accountant or cost accountant, with UDIN, listing the credit notes, the invoices they relate to and how the credit was reversed. Where the tax on such credit notes to one recipient in a financial year is ₹5,00,000 or less, an undertaking or certificate from the recipient itself is enough.
• Section 34(2), from 1 October 2025: the proviso substituted by the Finance Act 2025 bars any reduction in your output tax unless a registered recipient has reversed the credit attributable to the credit note. On the portal this happens when the buyer accepts the credit note in the Invoice Management System (IMS); a rejected credit note does not reduce your liability.

The Finance Act 2026 change

The Finance Act 2026 amends section 15(3)(b) to tie post-sale discounts to a section 34 credit note and the recipient's reversal of input tax credit. Amendments to the CGST Act made by a Finance Act apply only from the date the government notifies, and we could not confirm a notification as of 9 October 2026. Until the new wording is in force, apply the three conditions above, and check the current text before changing your schemes.

Rate difference and price protection credit notes

"Rate difference" covers two different things, and the difference matters:

• A wrong price on the invoice. The purchase order said ₹3,050 a unit and you invoiced ₹3,200. That is an overcharge: the taxable value charged exceeds the correct value, a ground for a credit note under section 34(1) in its own right. Section 15(3) does not apply, because nothing was discounted.
• A price reduction after the sale. You cut your list price and compensate dealers for stock they already bought at the old price ("price protection"). That is a discount after supply. It reduces GST only if the price protection was agreed in the dealer agreement before the supplies, is linked to the invoices for the stock, and the dealer reverses the credit.

Cauvery's distributor agreement promises price protection on unsold stock for 60 days. On 1 October Cauvery cuts the price of its 750 W model from ₹3,200 to ₹2,950; Malnad holds 120 units bought in September.

Cash discounts for early payment

A cash (prompt payment) discount is written into the payment terms at the time of supply, but nobody knows at invoicing whether it will be earned. If the buyer pays early, you have two options:

Commercial (financial) credit notes

CBIC Circular 92/11/2019-GST says a supplier may issue a financial or commercial credit note even when the conditions of section 15(3)(b) are not met. Such a credit note does not reduce the value of the supply or the supplier's tax, and it does not affect the supplier's own input tax credit.

• Do not show GST on it, and do not report it in GSTR-1.
• Title it so nobody mistakes it for a tax document: "Credit note (commercial, without GST)".
• The buyer keeps the input tax credit on the original invoice, because the supplier's tax has not been reduced.
• CBIC Circular 251/08/2025-GST (September 2025) addressed post-sale discounts again. As we read it, it confirms that the recipient need not reverse credit on a commercial credit note, and that a discount a manufacturer gives its dealer after the sale is not, by itself, payment for a promotional service by the dealer; a separate agreement for promotion would be. Read the circular for the exact cases before you rely on it.

Journal entries for discount credit notes

For Cauvery's ₹55,200 volume discount as a tax credit note:

As a commercial credit note, the whole amount goes through discount allowed and discount received, with no tax lines: Cauvery debits discount allowed and credits Malnad; Malnad debits Cauvery and credits discount received. If the buyer still holds the goods, its accountant may reduce the stock cost instead of booking discount income.

United Kingdom: VAT on discounts after the sale

HMRC charges VAT on the amount actually paid when a prompt payment discount is taken (VAT Notice 700, section 7.3.2). You can handle it in two ways (section 18.2.2): issue a credit note for the discount and VAT when the customer pays early, or put the discount terms on the original invoice, with the deadline and a statement that the customer may only recover the VAT actually paid. With the second method no credit note is needed. Volume rebates and other reductions agreed after the sale are made with a VAT credit note under section 18.2.

Mistakes to avoid with discount credit notes

• No written scheme before the sales. A volume or target discount without a prior agreement can only be a commercial credit note.
• A lump-sum discount with no invoice link. List the invoices, and the discount on each, in an annexure.
• Reducing GST without the buyer's reversal. From 1 October 2025 your tax falls only when the buyer accepts the credit note in IMS.
• Treating an overcharge as a discount. A wrong price is corrected under section 34(1); the section 15(3) conditions do not apply.
• Showing GST on a commercial credit note. It confuses the buyer into reversing credit it should keep.

Key terms

Trade discount

A discount shown on the invoice; GST is charged on the discounted price.

Post-sale discount

A discount given after the supply, by a tax or commercial credit note.

Volume (target) discount

A discount earned when purchases over a period exceed an agreed amount.

Price protection

A credit to a dealer for a price cut on stock it already bought.

Commercial credit note

A credit note without GST, reducing the amount owed but not the taxable value.

Prompt payment discount

A discount for paying within a set time; in the UK, VAT is on the amount actually paid.

Questions people ask