When you deal with GST long enough, you realize the actual confusion is never about rates or HSN codes. Most of the time, the real trouble starts when you try to figure out the taxable value, especially when discounts and post-sale adjustments are involved.
You may think, “I’ve given a discount, so GST should apply only on the reduced value.” But GST doesn’t work purely on common sense. It works on Section 15, and particularly Section 15(3) when discounts come into the picture.
In this blog, we’ll walk through everything about exclusions and discounts under GST, explaining when discounts can be deducted from value and when they can’t. We’ll also break down real-life examples so you get crystal clarity.
This is the kind of topic where a small misunderstanding can lead to notices, mismatched ITC, or incorrect returns—so let’s break it down step by step.
1. Understanding the Concept of “Exclusions” Under GST
A lot of people believe that exclusions mean “things that are NOT part of the value”. And while that’s true on the surface, the GST law looks at exclusions mainly in the context of discounts.
In simple words:
- GST allows certain discounts to be excluded (deducted) from taxable value.
- GST disallows certain discounts, even if you issue a credit note.
The challenge is knowing which is which.
Section 15(3) is the rulebook for that.
2. Section 15(3) — The Golden Rule for Discounts
Section 15(3) divides discounts into two categories:
A. Discounts BEFORE or AT the time of supply (Invoice-time discounts)
→ Always allowed as deduction → MUST be shown on invoice
B. Discounts AFTER supply (Post-supply discounts)
→ Allowed ONLY if strict conditions are met → If conditions fail, discount CANNOT reduce taxable value
Let’s break both categories down.
3. Discounts Allowed BEFORE or AT Time of Supply
This is the simplest part of the law.
If you give a discount before or at the time of sale, and you show it on the invoice, then:
- GST applies on the reduced value.
These are typically:
- Trade discounts
- Quantity discounts
- Cash discounts (if shown on invoice)
- Promotional discounts
- Early order discounts
- Festival price cuts (if shown in bill)
Example : 30% Discount on Biscuits
A supplier gives 30% trade discount on list price.
- List price of biscuits carton: ₹200
- Discount: 30% (₹60)
- Value after discount: ₹140
Since discount is:
- Pre-agreed
- Given before supply
- Shown on invoice
👉 GST applies on ₹140, not ₹200.
Simple and straightforward.
4. Post-Supply Discounts — When They Are Allowed
This is the part most businesses get wrong.
Section 15(3)(b) allows post-sale discounts ONLY IF ALL three conditions are satisfied:
Condition 1:
Discount is agreed upon before or at the time of supply, even though the actual discount is given later.
Condition 2:
Discount can be linked to a specific invoice.
Condition 3:
Recipient reverses ITC proportionately.
If even one condition fails → discount can’t reduce taxable value.
Example: 5% Diwali Discount on Cookwares
A cookware supplier announces:
- Extra 5% discount if purchaser orders more than 1000 cookers during the festival month.
Although the discount depends on achieving a target AFTER the supplies are made, notice:
- The scheme existed before supply
- The discount can be calculated invoice-wise
- Credit note can be issued accordingly
Therefore:
- GST will be reduced
- Buyer must reverse proportionate ITC
- Supplier issues a credit note with GST
This is a classic allowable post-supply discount.
5. Post-Supply Discounts — When They Are NOT Allowed
Here is where most businesses get trapped.
Some discounts are not eligible to reduce taxable value even if:
- You issue a credit note, or
- You genuinely reduce price, or
- You want to help the customer
In these cases, GST is still calculated on the original value.
These disallowed discounts are commonly called secondary discounts.
What are secondary discounts?
They are discounts that:
- Were NOT agreed before supply
- Have NO prior contract
- Are NOT linked to invoices
- Are purely commercial adjustments
- Are given unexpectedly after supply
- Cannot be proportionately reversed by buyer
Such discounts cannot reduce GST liability.
Example : Biscuit Cartons (Commercial Credit Note)
A sold 10,000 biscuit packets to a retailer at ₹10 per packet.
Total invoice value = ₹1,00,000 (plus GST)
Later, to push sales, A reduces the price to ₹9 per packet and issues a “credit note”.
But because:
- This discount was NOT agreed before supply
- It was NOT part of the original contract
- It cannot be linked to specific invoices
- ITC reversal is not possible
👉 GST value CANNOT be reduced.
Supplier must issue a commercial credit note — without GST effect.
This is a classic non-permissible post-sale discount.
6. Free Supplies & Promotional Items
People often think that free items = zero value. But GST doesn’t work that way.
Example:
- Buy 10 units, get 1 free
- Buy 2 take 3
- Free gift on bulk purchase
If the “free item” is part of an overall discount scheme, then it may reduce taxable value only if conditions of Section 15(3) are satisfied.
Otherwise, the value of free goods is included under valuation rules.
7. Exclusions From Value — Items That Should NOT Be Added
Apart from discounts, GST law also excludes certain items from taxable value:
1. Government subsidies
Only private subsidies are included. Government subsidies are excluded.
2. Discounts that satisfy Section 15(3)
Only these discounts can reduce taxable value.
3. Pure Agent reimbursements (covered under valuation rules)
Certain payments made as pure agent are excluded.
4. Post-sale discounts given through commercial credit notes
These do not affect taxable value.
Let’s focus purely on discounts though, as per Section 15(3).
8. Combined Example to Understand All Rules
Let's take a comprehensive example.
Suppose:
- Base price: ₹1,00,000
- Trade discount @10% shown on invoice: ₹10,000 (allowed)
- Packing charges: ₹2,000 (must be added)
- Post-sale discount of ₹5,000 (NOT pre-agreed): Not allowed
- 2% additional discount based on quarterly target (pre-agreed): Allowed
- Late payment interest of ₹1,800: Must be added
Calculation:
| Particulars | Amount |
| Base price | 1,00,000 |
| Less: Trade discount @10% | (10,000) |
| Add: Packing charges | 2,000 |
| Add: Late payment interest | 1,800 |
| Add: Quarterly discount (allowed?) | (2,000) Deductible |
| Add: Post-sale discount not pre-agreed | Not allowed |
| Value of Supply | ₹93,800 |
GST applies on ₹93,800.
Notice:
- Allowed discounts are deducted
- Disallowed discounts do not reduce value
- Interest is added
- Packing charges are added
This matches exactly with Section 15(2) + Section 15(3).
9. Why GST Is Very Strict About Discounts
Mostly because businesses earlier used discounts as a tool to:
- Reduce assessable value
- Issue inflated credit notes
- Avoid tax on real price
- Adjust profit margins silently
- Manipulate invoice values
GST tried to ensure transparency by allowing only those discounts that were:
- Pre-agreed
- Invoice-wise traceable
- ITC-neutral
- Documented properly
This is why Section 15(3) is strict and detailed.
10. The Golden Rules (Cheat Sheet Version)
Rule 1: Invoice-time discounts = Always allowed
(If shown in invoice)
Rule 2: Post-supply discounts = Allowed only if 3 conditions are met
- Pre-agreed
- Linked to invoices
- ITC reversed by buyer
Rule 3: Secondary discounts = Not allowed
Issue commercial credit note only.
Rule 4: Government subsidies = Excluded
Private subsidies = Included in value.
Rule 5: Always document discount policies beforehand
Especially schemes based on quantity, sales target, or festivals.
Final Thoughts
Section 15(3) may look complicated at first, but once you break it down into its components, it actually becomes predictable and easy to apply. The entire purpose of this section is to ensure fair valuation, proper GST calculation, and transparency between supplier and buyer.
Understanding which discounts reduce taxable value and which ones don’t can save you from incorrect invoicing, tax mismatches, ITC disputes, and audit issues later.
In the next article, we’ll dive deeper into valuation rules (Rule 27 to Rule 31) that apply when transaction value cannot be used — which is often the next biggest area of confusion in GST.
