Discount Received from Supplier: GST, ITC and HSN Code

Updated 12 November 2026 · By Ashok Sachdev · Source: Section 15(3) and Section 34 of the CGST Act, CBIC Circular 92/11/2019-GST and Circular 212/6/2024-GST

Most GST articles look at discounts from the seller's side: how to show 10% off on the bill. This guide is for the other side of the counter: the kirana, medical, mobile or hardware shop that receives discounts, rebates and schemes from distributors and brands. If you have ever opened your GSTR-2B and wondered why a credit note reduced your ITC, or asked your accountant which HSN to put against "discount received", this is for you. For discounts you give to your own customers, read GST on discount: HSN code and how to show it on a bill.

Is GST applicable on discount received?

No, not in the normal case. GST is charged on a supply. When a distributor gives you 2% off, you have not supplied anything to the distributor; you have simply paid less for what you bought. So:

• You do not raise an invoice for the discount.
• You do not show it in your GSTR-1 as an outward supply.
• There is no HSN or SAC code to look up, because there is no supply.

The discount still matters for GST, but on the input side. It can reduce the input tax credit you are allowed to keep, depending on how the supplier passes it to you.

Four ways a supplier gives you a discount

Source: Section 15(3) of the CGST Act, Section 34 and CBIC Circular 92/11/2019-GST (paragraph 3 on secondary discounts). Finance Act 2025 reworded Section 15(3)(b); confirm the current text with your CA.

1. Discount on the purchase bill: the simplest case

When the discount is printed on the supplier's invoice, GST is charged on the price after the discount (Section 15(3)(a)). Your ITC is simply the GST shown on the bill. Nothing is reversed later, and there is no separate entry for "discount received", because the purchase is already booked at the lower price.

This is also the cleanest option for you. If your distributor offers a scheme, ask whether it can be given on the bill rather than later. Less paperwork, nothing to chase in GSTR-2B, and your stock is valued at what you really paid.

2. Discount later through a GST credit note: reverse the ITC

Target schemes, quarterly volume rebates and turnover discounts from FMCG and mobile distributors usually come after the sales, as a credit note. A post-sale discount reduces the supplier's taxable value only when it was agreed at or before the time of supply, is linked to the relevant invoices, and you reverse the ITC that relates to it. The supplier then issues a credit note with GST under Section 34 and reports it in GSTR-1.

On your side, the credit note shows up in GSTR-2B as a credit note against the supplier's GSTIN, and it reduces the input tax credit available to you. You have effectively paid less GST on those purchases, so you claim less.

Worked example: a 2% quarterly scheme

A kirana shop in Indore buys ₹2,00,000 of packed food from a distributor in a quarter, at 5% GST, so it has paid ₹10,000 of GST and claimed that as ITC. The scheme letter, signed before the quarter started, promises 2% back if purchases cross ₹1,50,000.

The figures are illustrative; use your own rates. The point: the GST part of the credit note is not extra income. It cancels out against the ITC you give up, and your real gain is the ₹4,000 discount.

Your supplier may ask you to confirm that you reversed the ITC. CBIC Circular 212/6/2024-GST lets the supplier rely on an undertaking from you, or on a CA or cost accountant's certificate for larger amounts. Expect this request on big scheme credit notes, and keep a copy of what you sign.

3. Financial credit note without GST: keep your ITC

If the discount was not agreed at the time of sale, for example a one-off extra rebate to clear old stock or to settle a complaint about late delivery, it cannot reduce the supplier's taxable value. Circular 92/11/2019-GST says the supplier may still issue a financial or commercial credit note for the amount, but without GST. The supplier keeps paying GST on the full invoice value, and you, the buyer, do not reverse any ITC.

In your books it is plain income: debit the supplier, credit "Discount received". It does not appear anywhere in your GST returns. Do not put GST on it yourself, and do not reverse ITC "to be safe": you would lose credit the law allows you to keep.

4. When a "discount" is really a payment for your service

Some brands give dealers an additional amount for doing something specific: a special sales drive, a window display, putting up their hoarding, an in-store promotion or a co-branded advertisement. Circular 92/11/2019-GST treats this differently. Because you did an activity for the brand, the amount is payment for a service you supplied. You raise a tax invoice for it, usually at 18%, and the brand takes ITC on your invoice.

This is where the confusion about "discount received HSN code" often comes from. The invoice you raise carries a SAC code for the service you did (advertising or sales promotion, depending on the activity), not an HSN code for goods. Ask your CA to pick the right SAC, and keep the brand's scheme letter that describes the activity. If you are below the GST registration limit and unregistered, talk to your CA before accepting such schemes, since a service income can count towards your turnover.

Free quantity schemes: "10 + 1 free"

Distributors often give extra pieces instead of money off: buy 10 cartons, get 1 free. CBIC treats offers like this as a single supply at the price charged, not a free gift. The supplier pays GST on the invoice value, and you can claim ITC on that invoice. Record all 11 cartons in stock at the total price you paid, so your cost per carton drops. If the free pieces arrive on a separate "free" invoice with zero value, keep it with the main bill so your stock and the supplier's records match.

How to record discount received in your books

Your accountant may use slightly different ledger names, which is fine. What matters for GST is the right column: whether input GST goes down (case 2), stays (case 3) or output GST goes up (case 4).

Monthly checklist for shops that get schemes

1. Keep the scheme letter. It proves the discount was agreed in advance, which decides whether a GST credit note is valid.
2. Match credit notes in GSTR-2B. Every GST credit note from a supplier should match one you received on paper or WhatsApp. If one is missing, ask the supplier; if one appears that you did not expect, ask before accepting it. See GSTR-2B reconciliation for a retail shop.
3. Reverse ITC once, not twice. Credit notes in GSTR-2B already reduce the auto-filled ITC in GSTR-3B. Check with your CA that the same credit note is not also reversed by hand.
4. Book financial credit notes as income. No GST, no ITC change.
5. Invoice promotion payments. If the brand paid you for an activity, raise your tax invoice in the same month.
6. Reduce the supplier's balance. Whatever the GST type, the credit note reduces what you owe. Update the supplier ledger so you do not overpay.

Your CA will need all of this every month; the list of papers is in what your CA needs for monthly GST returns.

Where billing software helps

Discount mistakes on the buying side usually come from scattered paperwork: the scheme letter is in one WhatsApp chat, the credit note in another, and the supplier balance in a notebook. In RichBills you enter purchase bills at the price you actually paid, send goods back through purchase returns (stock is corrected automatically) and keep a running ledger for every supplier, so a credit note reduces the balance you owe in one place. See purchase and supplier management and supplier payments ledger. RichBills does not file GST returns; your CA still checks GSTR-2B and makes the ITC reversal.

Pricing: 30 din free, phir ₹99/month pehle 3 mahine, phir ₹199/month ya ₹1,999/saal.