Indirect Tax Laws · Value of Supply

Exclusions from Value of Supply: Discounts and Subsidies (GST)

Updated 5 October 2026 · Fact-checked

Under section 15 of the CGST Act, transaction value excludes a discount given before or at the time of supply if it is recorded on the invoice. A post-supply discount is excluded only if agreed before or at supply, linked to specific invoices, and the recipient reverses the related ITC. Subsidies are included only if given by someone other than the Central or State Government.

Understand Exclusions: Discounts and Subsidies

Value of supply is normally the transaction value: the price actually paid or payable, when the supplier and recipient are unrelated and price is the sole consideration. A discount reduces that price. The law has to decide whether the tax is charged on the price before the discount or after it.

There are two kinds of discount. A discount given before or at the time of supply is excluded from value, but only if it is recorded in the invoice. The tax is then charged on the net price. This is what is usually called a trade discount or an invoice-level discount.

A discount given after the supply has been made (for example a volume rebate at year end) is excluded from value only if three conditions are met. First, it was established in an agreement entered into at or before the time of supply. Second, the discount is specifically linked to relevant invoices. Third, the recipient has reversed the input tax credit attributable to the discount. The supplier then issues a credit note, which must follow the time limit in section 34. If any condition fails, the discount does not reduce value and tax stays payable on the full amount.

The term 'cash discount' is not used in the Act. For exam purposes, treat an early-payment discount that was not agreed at or before supply and is not linked to invoices as failing the post-supply conditions. Always test the facts against the conditions, not the label.

Subsidies work differently. Under section 15(2)(e), the value includes subsidies directly linked to the price of the supply, but only when they are received from someone other than the Central Government and State Governments. The subsidy is added to the transaction value. A subsidy from the Central or State Government is therefore not added to value. A subsidy from a private party, a trust or a non-government body that is directly linked to the price is added.

Key rules to remember

Pre-supply discount: Value = Price before discount − discount (only if the discount is shown on the invoice); Discount must be given at or before the time of supply and recorded in the invoice.
Post-supply discount conditions: Excluded only if (1) agreed at or before supply + (2) linked to specific invoices + (3) recipient reverses proportionate ITC; All three must be met. The supplier issues a credit note under section 34 within its time limit.
Failure of conditions: Discount not allowed → Value = full price (before discount); Tax remains payable on the gross amount and no reduction is available.
Subsidy inclusion: Value = Transaction value + non-government subsidy directly linked to price; Section 15(2)(e): subsidy from the Central or State Government is not included.

How to solve Exclusions: Discounts and Subsidies questions

Use this sequence for any question on discount or subsidy in value of supply.

1List the price, each discount and each subsidy given in the facts, and note when each was given.
2Classify every discount as given at or before supply, or after supply.
3For a discount at or before supply, check that it is recorded in the invoice. If yes, deduct it. If not shown on the invoice, do not deduct it.
4For a post-supply discount, test the three conditions: agreement at or before supply, link to specific invoices, and ITC reversal by the recipient. Deduct only if all three are met.
5For each subsidy, identify the payer. Government (Central or State) means exclude. Any other payer means include if linked to the price of the supply.
6Add the includible items, deduct the allowed discounts, and compute value. Apply the GST rate to this value.
7State the conclusion in provision, facts and conclusion form, and mention the credit note where a post-supply discount is involved.

Quickest way: Three-gate check

When to use it: Use when a case scenario or MCQ gives several discounts and subsidies and you have little time.

Gate 1: Is the discount on the invoice, given at or before supply? If yes, deduct it and stop.
Gate 2: If given later, check agreement, invoice link and ITC reversal. Any gap means no deduction.
Gate 3: For subsidy, ask who paid. Central or State Government means ignore. Anyone else means add.
Compute value, apply the rate, and write one line of reasoning per gate.

Common mistakes in Exclusions: Discounts and Subsidies

Deducting a post-supply discount without checking the ITC reversal condition.
Students focus on the agreement and the credit note and forget the third condition.
Fix: Write the three conditions in the margin and tick each one before deducting.
Deducting an invoice-level discount that is not shown on the invoice.
Students assume any discount reduces value.
Fix: Check that the facts say the discount is recorded in the invoice. If not, add it back.
Treating all subsidies as part of value.
Students remember that subsidies are included and miss the government exception.
Fix: Always identify the payer. Central and State Government subsidies are excluded.
Including a subsidy that is not linked to the price of the supply.
Students include any amount received from a third party.
Fix: Include a non-government subsidy only if it is directly linked to the price of the supply.
Treating an early-payment discount as automatically allowed because it is called a cash discount.
The label is taken from accounting, where it is treated as a financial expense.
Fix: Test it against the post-supply conditions. If it was not agreed in advance or linked to invoices, it does not reduce value.
Reducing value without noting that the supplier must issue a credit note within the section 34 time limit.
Students stop at the calculation.
Fix: Add a line on the credit note and its time limit in the descriptive answer.

Worked examples

Example 1

Alpha Traders sold goods to Beta Ltd at a list price of ₹5,00,000. The invoice shows a trade discount of ₹50,000. Under an agreement made before supply, Alpha also gives a 2% volume rebate, computed on the invoice value after trade discount. The rebate is linked to this invoice, Beta has reversed the proportionate ITC, and the rebate is given by a credit note after supply. Compute the value of supply.

Show the solution

List price is ₹5,00,000. The trade discount of ₹50,000 is recorded in the invoice and given at supply, so it is excluded: ₹5,00,000 − ₹50,000 = ₹4,50,000.
The volume rebate is a post-supply discount. Check the three conditions: agreed before supply (yes), linked to the invoice (yes), ITC reversed by Beta (yes). So it is excluded.
Rebate = 2% of the invoice value after trade discount = 2% of ₹4,50,000 = ₹9,000.
Value after the rebate = ₹4,50,000 − ₹9,000 = ₹4,41,000.

Answer: Value of supply is ₹4,41,000. The credit note for the rebate must be issued within the time limit in section 34.

Example 2

Gamma Ltd manufactures a machine and sells it to Delta Ltd for ₹8,00,000, which is the price before any discount. Gamma receives a ₹60,000 subsidy from the State Government and a ₹40,000 subsidy from a private industry trust. Both are linked to the price of the machine. Gamma also gave Delta a post-supply discount of ₹20,000 that was not agreed before supply. Compute the value of supply.

Show the solution

Start with the price payable before the discount: ₹8,00,000.
The ₹60,000 subsidy is from the State Government, so it is not included.
The ₹40,000 subsidy is from a private trust and is linked to the price, so it is included: ₹8,00,000 + ₹40,000 = ₹8,40,000.
The ₹20,000 discount was given after supply and not agreed at or before supply. The first condition fails, so it cannot be excluded and does not reduce value.
Value remains ₹8,40,000.

Answer: Value of supply is ₹8,40,000. The State Government subsidy is left out, the trust subsidy is added, and the discount does not reduce value.

Exam tips

In case scenarios, underline the word 'invoice' and the payer of any subsidy. Both decide the answer.
When a post-supply discount appears, write all three conditions, even if the facts satisfy them. Examiners look for the list.
State your assumption clearly when the base for a percentage rebate is unclear. A stated assumption protects marks.
Mention the credit note under section 34 and its time limit in descriptive answers on post-supply discounts.
In MCQs, check whether the discount fails any condition before computing. A single failed condition changes the value.

Practice questions from Value of Supply

Exclusions: Discounts and Subsidies: frequently asked questions

What are the conditions for a post-supply discount under section 15(3) CGST Act?

The discount must be established in an agreement made at or before the time of supply and must be linked to specific invoices. The recipient must also reverse the input tax credit attributable to the discount. All three conditions must be met.

Is a cash discount excluded from value of supply under GST?

The Act does not use the term cash discount. An early-payment discount is excluded only if it meets the conditions for a pre-supply or post-supply discount. If it was not agreed in advance or linked to invoices, it does not reduce value.

Is a subsidy included in the value of supply?

A subsidy is included if it is directly linked to the price of the supply and is received from someone other than the Central or State Government. Subsidies from the Central or State Government are not included.

Does the supplier need to issue a credit note for a post-supply discount?

Yes. The supplier issues a credit note under section 34, within the time limit given there. The credit note supports the reduction in tax liability.