Turnover Discount (TOD) Under GST When It Wasn't Agreed at Year Start
A year-end TOD not established at or before supply fails Section 15(3)(b) — no GST credit note; the route is commercial, and the dealer keeps full ITC.
In short
A year-end turnover discount that was not agreed at or before the time of supply fails Section 15(3)(b) of the CGST Act, so it cannot reduce the supplier's GST through a tax credit note. The route is a commercial credit note — and per CBIC Circular 251/08/2025-GST, the dealer does not reverse any input tax credit on it. The supplier absorbs the GST already paid on the original price; the dealer's credit stays intact. This is general information, not tax advice.
Every December the same question reaches CAs and forums: we've decided to give our dealers a turnover discount for the year — can we issue a GST credit note? Since September 2025 the answer is finally clean, and most content online predates it.
The answer: a TOD not agreed at or before supply fails Section 15(3)(b) — no tax-adjusting credit note. The route is a commercial credit note, and per Circular 251/08/2025-GST the dealer keeps full ITC. The supplier absorbs the GST; the dealer's credit is untouched.
Why the year-end TOD fails the tax route
Section 15(3)(b) of the CGST Act allows a post-supply discount to reduce taxable value only when three conditions all hold:
- The discount was established in an agreement at or before the time of supply;
- It is linked to specific invoices;
- The recipient reverses the proportionate ITC — a condition the Finance Act 2025 hardened into the supplier's statutory prerequisite from 1 October 2025.
A TOD conceived after the purchases happened fails condition one by definition. No paperwork issued in March can make April's supplies "pre-agreed".
What Circular 251 settled
Before September 2025 the commercial-credit-note route carried a nagging doubt — must the dealer reverse ITC anyway? Circular 212/6/2024 had built a certificate mechanism around exactly that anxiety. Circular 251/08/2025-GST rescinded Circular 212 and clarified the position: on a commercial credit note the supplier has not reduced output tax, so the recipient has nothing to reverse — full ITC stays. It also clarified that routine post-sale discounts are price adjustments, not payment for a dealer's services. (The full chronology from 212 to 251 is in our Circular 251 explainer.)
The two routes, side by side
| GST credit note (pre-agreed TOD) | Commercial credit note (year-end TOD) | |
|---|---|---|
| s.15(3)(b) conditions | All three met | Not met — by design or by timing |
| Supplier's GST | Output tax reduced | No tax adjustment — supplier absorbs it |
| Dealer's ITC | Proportionate reversal required (statutory from 1 Oct 2025) | No reversal — Circular 251 |
| Time limit | s.34(2): 30 Nov after the FY, or annual return | None |
| Document | Rule 53(1A) fields mandatory | Commercial document, own series |
The economics in the FAQ above put a number on the difference — which is precisely the argument for structuring next year's TOD in the agreement now.
The operational takeaway
Treat the settlement route as a scheme-design decision, not an accounting afterthought: decide at design time whether this scheme should ever adjust tax; if yes, write it into the agreement before supplies begin and track the s.34(2) window; if no, run a clean commercial-credit-note series and document the basis. The TDS side of the same payment is its own question — covered in is TDS applicable on turnover discount.
This is general information, not tax advice — apply the statutory positions to your facts with your CA.
The cleanest way out of this problem is not to have it: agree the discount before the period starts and record it where it cannot be edited after the fact. That is a straightforward capability of software that versions rebate agreements.
Frequently asked questions
Can we issue a GST credit note for a TOD we decided at year end?
Not with tax adjustment. Section 15(3)(b) requires the discount to be established in an agreement at or before the supply and linked to invoices, with the recipient reversing proportionate ITC. A TOD invented at year end fails the first condition — the credit note that settles it is commercial, adjusting only the trading balance, not tax.
Does the dealer reverse ITC on a commercial credit note for TOD?
No. CBIC Circular 251/08/2025-GST (September 2025) put this beyond doubt: a commercial or financial credit note does not require the recipient to reverse input tax credit, because the supplier has not reduced its output tax. The dealer's ITC on the original invoices stays intact.
What does the supplier lose by settling TOD commercially?
The GST already paid on the portion of the price now being returned as discount. On a ₹10,00,000 TOD at 18%, a valid GST credit note would have recovered ₹1,52,542 of tax (₹10L × 18/118 if the TOD is tax-inclusive); a commercial credit note recovers none. That difference is the price of not pre-agreeing the scheme — and the business case for writing next year's TOD into the agreement now.
Can we fix this for the current year retrospectively?
No — pre-agreement means at or before the supplies, and paper dated backwards is worse than the tax cost. The fix is prospective: put the TOD structure (slabs, base, settlement route) into the agreement or a circular before the new period's supplies begin. Note the GST Council has recommended changes to the pre-agreement requirement; verify the enacted position with your CA at the time you act.
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