Why this matters now

A discount only reduces price and carries no separate GST, but a payment for work done is a service and attracts 18% GST. Most GST notices on distributor schemes come from mixing up the two. The position has become much clearer over the last year. CBIC issued Circular No. 251/08/2025-GST on 12 September 2025, settling how post-sale discounts are to be treated. The Finance Act, 2026 has also amended Sections 15(3)(b) and 34, though these changes will apply only from a date the government notifies. This newsletter explains how distribution schemes work in practice, the GST treatment of each type, how to record them in the books, and the steps that keep you clear of notices.

How the distribution chain works

Most consumer goods reach the customer through a chain of independent businesses, each buying and reselling the goods. We will use one example throughout this newsletter: a biscuit company called Sunrise Foods.

1. Sunrise Foods (the company) makes the biscuits and sells in bulk, say 1,000 cartons, to its distributor.
2. Sharma Distributors (the distributor) stores the stock and supplies smaller quantities to hundreds of shops in its territory.
3. Ramesh Kirana Store (the retailer) buys a few cartons at a time and sells single packets.
4. The customer buys one packet.

The distributor is not an agent of the company. It buys the goods, owns the stock and earns its margin on the difference between its buying and selling price. In GST language, these are principal-to-principal sales. To win shelf space against competitors, the company rewards the distributor through discounts and schemes. The distributor, in turn, usually shares part of that benefit with retailers.

Types of incentives seen in practice

Nearly every scheme falls into one of five types. Identifying the type correctly decides the GST treatment.

GST treatment of each type

The examples below assume GST at 18%. Input tax credit (ITC) is the GST a buyer pays on purchases and deducts from the GST it collects on its own sales.

1. Discount on the invoice

GST is charged on the discounted price under Section 15(3)(a). Sunrise bills ₹950 plus GST of ₹171. No further action is needed by either party.

2. Post-sale discount by credit note

The company has already charged GST on the full price. It can give the ₹20,000 back in one of two ways.

Option A — GST credit note. The company reduces its sale value by ₹20,000 and its GST by ₹3,600. The distributor reverses ₹3,600 of ITC. Under the law as it stands today, this route is available only if all three conditions are met:

• the scheme was agreed at or before the time of sale;
• the discount can be linked to specific invoices;
• the distributor reverses the ITC attributable to the discount.

The Finance Act, 2026 removes the first two conditions, keeping only the credit note and the ITC reversal. Until that amendment is notified, the older conditions continue to apply.

Option B — financial (commercial) credit note. The company gives ₹20,000 back without adjusting GST. It does not recover the ₹3,600 of output tax. Circular 251/08/2025 confirms the distributor keeps its full ITC and need not reverse anything.

Is the ₹20,000 income on which the distributor pays GST? No. Circular 251/08/2025 clarifies that in a principal-to-principal chain, a post-sale discount simply reduces the distributor’s purchase price. It is not consideration for any service, even if the distributor promotes the goods to increase its own sales.

3. Payment for a specific job

Where the distributor carries out defined activities for the company — advertising, co-branding, display, exhibitions — under an agreement for a fixed consideration, it is supplying a service. The distributor must raise a tax invoice on Sunrise: ₹50,000 plus ₹9,000 GST. Sunrise can take ITC of the ₹9,000.

4. Customer-specific price support

This is the one case where Circular 251/08/2025 goes against the distributor. Where the company has an agreement with the end customer and instructs the distributor to sell at that price, the company’s reimbursement becomes part of the value of the distributor’s sale. The distributor must pay GST on the amount reimbursed.

5. Non-cash rewards

A trip or gift is not a discount on price. The company cannot claim ITC on gifts given free under Section 17(5)(h). For the distributor, the reward attracts no GST unless it is tied to a service performed for the company.

Passing the benefit on to retailers

Pass the benefit on in the same way you received it. The same rules apply between the distributor and the retailer, but a mismatch between the two levels creates a real cost. Example of a mismatch. Sunrise gives Sharma Distributors a financial credit note, so Sharma keeps full ITC on the higher purchase price. Sharma then passes the discount to Ramesh through a GST credit note or a lower invoice price. Sharma’s output GST falls, its ITC stays high, and credit builds up in its ledger. That credit is hard to use. The rate is the same on purchase and sale, so the inverted duty refund route is not available.

The reverse mismatch also costs money. If Sharma reverses ITC on a GST credit note from Sunrise but gives Ramesh only a financial credit note, Sharma pays output GST on a higher value than it needs to.

Selling at or below purchase cost is not wrong in itself. Between unrelated parties, the actual price charged is accepted as the value under Section 15(1). If the distributor and company are related, the valuation rules apply, though the invoice value is generally accepted where the buyer can claim full ITC.

Common reasons for GST notices

Most notices on distributor schemes trace back to six avoidable issues.

1. Ledger names. Scheme amounts booked as “incentive income”, “commission” or “other income” appear in the financial statements and ITR. Officers compare these with GSTR-1 and treat the gap as an untaxed service.
2. Mixed schemes. A target discount and a display fee paid as one lump sum lets the officer treat the whole amount as payment for a service.
3. No prior written scheme. A company that reduces GST through a credit note without a scheme agreed before the sale risks having the reduction disallowed.
4. Credit notes not matched. A GST credit note that the distributor does not accept, or does not reverse ITC on, leaves the company’s reduction exposed.

In summary

A discount reduces price; a payment for work is a service. Getting the classification, the credit note method and the ledger names right removes most of the GST risk in distributor schemes.