Looking for expert help with Income tax and GST for FMCG distributors and stockists India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Key Takeaways
- A financial or commercial credit note from the FMCG company doesn't reduce your purchase value, so you keep the full ITC (CBIC Circular 251/08/2025-GST, 12 September 2025).
- A GST credit note under Section 34 does reduce it. You must reverse the matching ITC, and since 1 October 2025 the company's tax is cut only after you do.
- Most packaged FMCG staples are 5% from 22 September 2025: biscuits, chocolates, namkeen, toothpaste, hair oil, shampoo and toilet soap. Detergents are 18%. Sweetened aerated drinks are 40% (Notification 9/2025-Central Tax (Rate)).
- Section 44AD covers own-account distributors up to Rs 2 crore turnover, or Rs 3 crore with cash receipts within 5%. Commission-based C&F agents can't use it.
- Company trips and gold coins attract 10% TDS under Section 194R above Rs 20,000 a year, and 206C(1H) TCS is gone from 1 April 2025.
Do FMCG distributors have to reverse ITC on company credit notes? Only on GST credit notes. When the company issues a credit note under Section 34 of the CGST Act that reduces the tax charged, you reverse the matching ITC. A financial or commercial credit note without GST leaves the original value and tax unchanged, and CBIC Circular 251/08/2025-GST confirms no ITC reversal is needed for it.
A stockist for a biscuit or soap brand lives on schemes: quarterly targets, slab discounts, display money, year-end credit notes and the occasional trip to Bangkok. Each one has a GST treatment and an income tax treatment, and they aren't always the same. CBIC settled several long-running doubts in September 2025, and the same month moved most packaged groceries and toiletries to 5%. This guide covers what a distributor or super stockist needs for FY 2025-26 (AY 2026-27) under the Income-tax Act 1961, with the new section numbers that apply from 1 April 2026.
What GST rate do you charge on FMCG goods?
Most of what a grocery or personal-care distributor carries fell to 5% on 22 September 2025, when Notification 9/2025-Central Tax (Rate) replaced the old rate schedule. Cleaning products stayed at 18%, and sweetened soft drinks moved to the 40% slab.
Comparison
GST on Common FMCG Lines from 22 September 2025
| Product (HSN) | GST | Entry in Notification 9/2025-CT(R) |
|---|---|---|
| Biscuits, cakes, pastry and bakers' wares (1905) | 5% | Schedule I, S. No. 123 |
| Chocolates and cocoa food preparations (1806) | 5% | Schedule I, S. No. 116 |
| Pasta, noodles, vermicelli (1902) | 5% | Schedule I, S. No. 119 |
| Namkeen, bhujia, mixture (2106 90) | 5% | Schedule I, S. No. 143 |
| Hair oil, shampoo (3305) | 5% | Schedule I, S. No. 245 |
| Toothpaste (3306) | 5% | Schedule I, S. No. 246 |
| Toilet soap bars and cakes (3401) | 5% | Schedule I, S. No. 251 |
| Liquid hand wash and body wash put up for retail sale (3401) | 18% | Schedule II, S. No. 66 |
| Detergents, washing and cleaning preparations (3402) | 18% | Schedule II, S. No. 67 |
| Aerated waters with added sugar or flavour (2202 10) | 40% | Schedule III, S. No. 1 |
Source: Notification 9/2025-Central Tax (Rate), 17 September 2025, in force 22 September 2025 (rates shown are CGST plus SGST)
Check the HSN on your company's invoice before you bill a retailer. A soap bar and a liquid hand wash from the same brand sit in different schedules, and a wrong rate on your sales invoice is your liability, not the company's. Our GST rates guide covers other headings.
Which company credit notes change your GST?
This is where most distributor reconciliations go wrong. The question isn't what the scheme is called. It's what kind of document the company issues and what your agreement says.
Comparison
Five Kinds of Company Discounts and Their GST Effect on You
| What you get | Effect on your ITC or output GST | Basis |
|---|---|---|
| Discount printed on the invoice (slab or trade discount) | Lower value from the start. ITC is on the net invoice. | Section 15(3)(a), CGST Act |
| Volume or target discount agreed before the sale, linked to invoices, passed by a GST credit note | Reverse the ITC that relates to the discount | Section 15(3)(b) and 34; Circular 92/11/2019-GST |
| Financial or commercial credit note without GST (secondary or post-sale discount) | No ITC reversal. Original value and tax stand. | Circular 251/08/2025-GST, Issue 1 |
| Credit note so you can sell to a customer at a price the company agreed with that customer | Add the credit note to the value of your sale to that customer and pay GST on the total | Circular 251/08/2025-GST, Issue 2 |
| Payment for promotion services written into the agreement with a defined consideration | A separate supply of services by you. Raise a tax invoice and pay GST. | Circular 251/08/2025-GST, Issue 3 |
Source: CGST Act 2017, Sections 15 and 34; CBIC Circulars 92/11/2019-GST (7 March 2019) and 251/08/2025-GST (12 September 2025)
Example: GST credit note vs financial credit note. You buy biscuits worth Rs 10,00,000 in a quarter, plus 5% GST of Rs 50,000, which you claim as ITC. Your distributor agreement promises a 2% target discount, so you earn Rs 20,000.
- If the company issues a GST credit note for Rs 20,000 plus Rs 1,000 GST, you reverse Rs 1,000 of ITC. Your net ITC on that purchase becomes Rs 49,000.
- If it issues a financial credit note for Rs 20,000 with no GST, nothing changes on the GST side. Your ITC stays at Rs 50,000.
Either way, the Rs 20,000 reduces your cost of goods in your books for income tax.
Since 1 October 2025, the proviso to Section 34(2) says the company can't reduce its own output tax on a GST credit note until the recipient has reversed the ITC. So if you ignore a GST credit note, expect a call from the company's accounts team, and possibly a mismatch notice later. The company must report the credit note by 30 November after the end of the financial year of the sale, or by the date it files its annual return, whichever is earlier (Section 34(2)). Our credit note and debit note guide covers the return reporting.
Example: institutional price support. The company has agreed a price with a hospital chain for liquid hand wash and asks you to supply it. You bill the hospital Rs 90,000 against a normal price of Rs 1,00,000, and the company gives you a Rs 10,000 credit note for this order. Circular 251/08/2025-GST treats that Rs 10,000 as an inducement for your sale to the hospital, so it forms part of your consideration. GST at 18% is worked out on Rs 1,00,000 (Rs 90,000 plus Rs 10,000), which is Rs 18,000, not on Rs 90,000 alone.
Display money and promotion fees. CBIC's view is that ordinary post-sale discounts aren't payment for a service, even if you run promotions to clear stock. That changes when the agreement lists specific activities, such as advertising campaigns, co-branding, special sales drives, exhibition arrangements or customer support, with a clearly defined fee. Then you're supplying a service to the company and must charge GST on it. Read the scheme letter: "2% scheme" and "Rs 25,000 for shelf branding at 40 outlets" aren't treated the same way.
Finance Act 2026 rewrites Section 15(3)(b) to drop the prior-agreement and invoice-linking conditions. As of 7 October 2026, CBIC's consolidated text of the CGST Act shows that change as not yet notified, so the existing conditions still apply.
Free goods, buy-one-get-one and samples
Circular 92/11/2019-GST still governs these:
- Buy-one-get-one packs (a toothbrush with toothpaste, two soaps for the price of one) aren't free supplies. They're two items sold for one price. Charge GST on what the retailer pays, at the rate that applies to the combined supply, and keep your ITC.
- Free samples given away without any consideration aren't a supply under GST. But ITC on goods given as free samples or gifts is blocked (Section 17(5)(h), CGST Act). If you pay for samples and hand them out free, don't claim ITC on them.
- Staggered discounts on the invoice ("10% off above Rs 5,000") just lower the invoice value.
E-invoicing and e-way bills
Step-by-Step Guide
Monthly GST Routine for an FMCG Distributor
Check your e-invoice status
If aggregate turnover exceeds Rs 5 crore, every B2B invoice to a registered retailer must be reported to the Invoice Registration Portal (Notification 13/2020-Central Tax, as amended by 10/2023-Central Tax from 1 August 2023).
Generate e-way bills
Any movement of goods with consignment value above Rs 50,000 needs an e-way bill before the vehicle leaves (Rule 138, CGST Rules).
Sort company credit notes
Separate GST credit notes (reverse ITC) from financial credit notes (no reversal) and from price-support notes (add to your sale value).
Match ITC to GSTR-2B
Claim ITC only on invoices that appear in your GSTR-2B, net of GST credit notes the company has reported.
Bill promotion services separately
If the agreement pays a defined fee for named promotion services, raise a GST invoice on the company for it.
Source: CGST Act 2017, Sections 15, 16, 17(5)(h), 34; Rule 138, CGST Rules 2017; Notifications 13/2020-CT and 10/2023-CT; Circular 251/08/2025-GST
See our e-invoicing guide for Rs 5 crore businesses and e-way bill generation steps. If you'd rather hand off the monthly filings, our GST return filing service does the reconciliation every month.
Income tax: 44AD or books?
A distributor who buys from the company and sells to retailers on its own account is a trader, and Circular 251/08/2025-GST itself describes the manufacturer-to-dealer sale as principal to principal. A resident individual, HUF or partnership firm (not an LLP) can then use Section 44AD if turnover is up to Rs 2 crore, or Rs 3 crore where cash receipts are within 5% of turnover. Deemed profit is 6% of turnover received by banking channels and 8% of cash turnover.
A carrying and forwarding (C&F) agent or a stockist paid by commission is different. Section 44AD doesn't apply to income in the nature of commission or brokerage, or to anyone carrying on agency business. Those businesses keep books and declare actual profit.
Example (proprietor, new tax regime, FY 2025-26): turnover Rs 2,80,00,000, of which Rs 10,00,000 was collected in cash from small retailers. Cash is 3.57% of turnover, so the Rs 3 crore limit applies.
- 6% of Rs 2,70,00,000 (bank and UPI) = Rs 16,20,000.
- 8% of Rs 10,00,000 (cash) = Rs 80,000.
- Deemed profit: Rs 17,00,000.
- Tax: Rs 4-8 lakh at 5% = Rs 20,000; Rs 8-12 lakh at 10% = Rs 40,000; Rs 12-16 lakh at 15% = Rs 60,000; Rs 16-17 lakh at 20% = Rs 20,000. Total Rs 1,40,000.
- Income is above Rs 12 lakh, so the Section 87A rebate doesn't apply. Add 4% cess of Rs 5,600. Total: Rs 1,45,600.
Tax Rate Chart
New Tax Regime Slabs, FY 2025-26 (AY 2026-27)
Up to Rs 4 lakh
Rs 4-8 lakh
Rs 8-12 lakh
Rs 12-16 lakh
Rs 16-20 lakh
Rs 20-24 lakh
Above Rs 24 lakh
Source: Finance Bill 2025 memorandum; Section 115BAC(1A), Income-tax Act 1961
Here's the catch for distributors. FMCG margins are thin, and 6% of turnover may be well above what you actually make. If your books show a lower profit, you can declare actual profit instead of using 44AD. With cash receipts and cash payments each within 5%, no tax audit is needed under Section 44AB(a) until turnover crosses Rs 10 crore. Otherwise the audit limit is Rs 1 crore. One trap: if you used 44AD in any of the last five years and now declare a lower profit, Section 44AD(4) shuts you out of 44AD for the next five years. Section 44AD(5) then requires books and a tax audit whenever your income exceeds the basic exemption limit. Our Section 44AD guide and accounting and bookkeeping service cover the books side.
From FY 2026-27 the Income-tax Act 2025 applies: presumptive taxation moves to Section 58 (Table, S. No. 1), the audit thresholds to Section 63, and the bar on commission and agency income to Section 58(11). The limits themselves are the same.
TDS on both sides, and the trips and gold coins
194Q when you buy. If your turnover exceeded Rs 10 crore in the previous year, you're a "buyer" under Section 194Q. You deduct 0.1% on what you pay the company above Rs 50 lakh in the year. Say a distributor with FY 2025-26 turnover of Rs 12 crore buys Rs 8 crore from one company in FY 2026-27: TDS is 0.1% of Rs 7.5 crore, or Rs 75,000. From 1 April 2026 this sits in Section 393(1), Table S. No. 8(ii), of the Income-tax Act 2025.
194Q when you sell. A modern-trade chain or large retailer whose turnover exceeded Rs 10 crore deducts 0.1% on purchases from you above Rs 50 lakh. Check Form 26AS or AIS and claim it. TCS under Section 206C(1H) on the seller side doesn't apply from 1 April 2025 (Finance Act 2025). See our Section 194Q guide.
194R on scheme rewards. Foreign trips, gold coins, TVs and similar rewards for hitting targets are business benefits. Under Section 194R the company deducts 10% when the value it gives you in a financial year exceeds Rs 20,000, and for a reward given in kind it must make sure the tax is paid before handing it over. A Rs 1,50,000 trip means Rs 15,000 of TDS. You show the Rs 1,50,000 as business income (Section 28(iv), 1961 Act; Section 26(2)(f), 2025 Act) and claim the Rs 15,000 credit. The new home for 194R is Section 393(1), Table S. No. 8(iv). Our Section 194R guide has more.
Cash from retailers. Section 269ST bars receiving Rs 2 lakh or more in cash from one person in a day, for one transaction, or for one event. The penalty under Section 271DA equals the amount received. Paying any one person more than Rs 10,000 in cash in a day for an expense means you can't deduct it (Section 40A(3)). Under the 2025 Act these are Sections 186, 451 and 36(4). See our cash limits guide.
Common mistakes FMCG distributors make
- Reversing ITC on every credit note. Financial credit notes don't need it. Reversing anyway leaves money on the table.
- Ignoring GST credit notes. The company's tax cut now depends on your reversal, so unmatched notes come back as disputes.
- Treating price-support credit notes as plain discounts. If the company agreed a price with your customer, the credit note is part of your sale value and attracts GST.
- Using 44AD as a C&F or commission agent. The law bars commission and agency income from it.
- Leaving 194R rewards out of income. The company's TDS shows up in your AIS, and the matching income should be in your return.
How Tax Garden helps FMCG distributors
We sort your company credit notes every month into the three GST buckets, match them to GSTR-2B and file GSTR-1 and GSTR-3B through our GST return filing service. At year end we compare 44AD with your actual margin, check 194Q and 194R credits in AIS, and file through our ITR filing service. See pricing for plans.
