Tax Implications of Post Sale Discounts Under GST

Summary: Under the GST framework, post-sale discounts are addressed by Section 15(3) of the CGST Act. Discounts offered after the supply of goods or services can be excluded from the taxable turnover, provided they are established by prior agreements and linked to relevant invoices. This ensures that the recipient reverses any associated input tax credit. Additionally, credit notes must be issued as per Section 34(2) to adjust the tax liability. Several case laws, such as Supreme Paradise vs. Assistant Commissioner and Southern Motors vs. State of Karnataka, support the principle that post-sale discounts, if properly documented and in line with trade practices, do not form part of the transaction value. These decisions clarify that both trade and cash discounts are permissible deductions in calculating taxable turnover. Thus, businesses can issue credit notes for post-sale discounts and reduce their tax liability accordingly.

According to Section 15 (1) of CGST The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

And as per Section 15 (3) The value of the supply shall not include any discount which is given––

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices;.

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

The term “ ANY DISCOUNT” denotes that there many not be any restrictions under GST Act in giving discounts by the registered taxpayer to their customer, either before or after the supply. And that price being discount on sale value, cannot be a part of taxable turnover under GST Act as per section 15(3) of GST Act.

FOR EXAMPLE :

A manufacturer has supplied cars to his authorised distributors for sale to a prospective customers who intend to buy the cars. During the process the manufacturer issue tax invoice to distributor and the distributor issue his tax invoice to a prospective customer. In this trade, it is a general practice that the manufacture offers reduction in vehicle value towards discount. This reduction in price by way of discount may be at the time of sale or after the sale is completed. The discount or reduction in price after the sale is normally by way of credit note from manufacturer to authorised distributor. The authorised distributor will pass on the same discount to customer by way of credit note for difference in value along with tax collected on that reduction. This is general practice in trade to promote business. So the tax which was paid at the time of sale to the extent of discount in vehicle value can get back by the manufacturer from authorised distributor and authorised distributor form the customer

Sec 15 (3)(b) is permitting such practice of post sale discount, (i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; (ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

And as per Section 34 (2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than ³[the thirtieth day of November] following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:

 There fore any discount given by the registered taxpayer to their customer, before or after the supply, cannot be a part of taxable turnover under GST Act. And any discount allowed as a trade practice, is not part of taxable turnover. And the tax is payable only on the transaction value for which price actually paid for the supply of goods or services. Any discount or reduction in price after the sale should be by way of a valid credit note in connection with such tax invoice.

Supporting case Laws

The Hon’ble High Court of Madras in the case of Supreme Paradise Vs. Assistant Commissioner, adjudged that, Section 15(3)(b) of the respective GST Enactments is relevant only for determining the “transaction value” of the supplier where after the supply is affected and discount is offered to a recipient. Suppose after the supply was affected to the petitioner and discount was offered based on the scheme, the supplier would have been entitled to state that the discount offered to the petitioner cannot form part of the “transaction value” provided the conditions stipulated therein are satisfied namely:-

Such discount is established in terms of an agreement entered into at or before the time of supply and was specifically linked to the relevant invoice; Input tax credit attributable to the discount on the basis of the document issued by the supplier namely the petitioners manufacturer or distributor as the case may be, is reversed by the recipient of the supply like the petitioner. Thus, the discount offered to the petitioner can impact only the “transaction value” of the supplier of the petitioner. As far as the “transaction value” of the petitioner is concerned, it is the price which has been paid or actually payable for the supply of the goods.

There is no scope for confusing the discount offered to the petitioner and the discounted price at which the petitioner effects further sale to its customers. They are two independent transactions and there is no scope for intermingling them for demanding tax from the petitioner. The discounted price at which the petitioner sells the goods is relevant only for determining the “transaction value” adopted by the petitioner. Unless, the discounted price itself was on account of the subsidy as a result of which while the supplier would have been compensated without including into the “transaction value” in the invoice, question of adding such value to the transaction value of the petitioner cannot be countenanced.

THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL CHENNAI

M/s. S.K. Cars India (P) Ltd. Salem Vs Commissioner of GST & Central Excise, Appeal No.3/392, Adjudged that, The transaction between M/s. Maruti Suzuki India Ltd. and the dealer and subsequently sale transaction between the dealer and the customers are purely on principal to principal basis. The vehicle manufacturer M/s. Maruti Suzuki India Ltd. on the basis of yearly performance of sale grants the discount to the dealer, this discount is nothing but a discount in the sale of value of the vehicle and throughout the year therefore, these sales discount in the course of transaction of sale and purchase of the vehicles hence, the same cannot be considered as service for levy of service tax. This issue is no longer res-integra as the same has been decided in various judgments cited by the appellant.

 The Hon’ble Supreme court of India in the case of Southern Motors vs State Of Karnataka & Ors on 18 January, 2017. The Hon’ble supreme court held that :: To reiterate, trade discount though an admitted phenomenon in commerce, the computation thereof may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory.

 Supreme court judgment on M/S Ifb Industries Ltd vs State Of Kerala on 27 February, 2012 (SC) adjudged that :

Any concession shown in the price of goods for any commercial reason would be a trade discount which can legitimately be claimed as a deduction. Such a concession is usually allowed by a manufacturer or a wholesale dealer in favour of another dealer with the object of improving prospects of his own business. It is common experience that when goods are marketed through reputed companies, firms or other individual dealers the demand for such goods increases and correspondingly the business of the manufacturer or the wholesaler would become more and more prosperous and its capacity to withstand competition from other manufacturers or other dealers dealing in similar goods would also improve. Hence any concession in price shown in such circumstances by way of an additional incentive with a view to promote one’s own trade does qualify for deduction as a trade discount. 

 And the Hon’ble Supreme Court of India in the case of  M/s Maya Appliances (P) Ltd now known as Preethi Kitchen Appliances Pvt. Ltd Vs Addl. Commissioner of Commercial Taxes & Ors adjudged that :: The liability to pay tax is on the taxable turnover. Taxable turnover is arrived at after making permissible deductions from the total turnover. Among them are “all amounts allowed as discounts.” Such a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case. The expression “the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as such discount” is not happily worded. The words “in respect of the sales relating to such discount” cannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount. This is a matter of ascertainment.

Above all, it must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions. We accordingly allow the appeals and set aside the judgment of the High Court. We direct that in computing the taxable turnover for the relevant years, the appellant would be entitled to a deduction of the trade discount, following the parameters laid down in paragraph 40 of the judgment in Southern Motors (supra) and as explained above.

 THE SUPREME COURT OF INDIA in the case of Commissioner of Central Excise, Madras Versus M/s Addison & Co. Ltd. C. A. No. 7906 of 2002. Adjudged that, We have considered the submissions made by the Counsel carefully and examined the material on record. The questions that arise for consideration in this case are whether the Assessee is entitled for a refund and whether there would be unjust enrichment if the said refund is allowed. It was held by the Special Bench of CEGAT, New Delhi by its judgment dated 17.03.1994 in Collector of Central Excise, Madras Vs. Addison & Co. Ltd. that the turnover discount is not an admissible abatement on the ground that the quantum of discount was not known prior to the removable of the goods. In an appeal filed by the respondent-Assessee, this Court by its judgment dated 11.03.1997 in Addison & Co. Ltd. Vs. Collector of Central Excise, Madras (supra) held that the turnover discount is an admissible deduction. This Court approved the normal practice under which discounts are given and held that the discount is known to the dealer at the time of purchase. The Additional Solicitor General submitted that any credit note that was raised post clearance will not be taken into account for the purpose of a refund by the Department.

We do not agree with the said submission as it was held by this Court in Union of India Vs Bombay Tyre International (supra) that trade discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price. It is the submission of the Assessee that the turnover discount is known to the dealer even at the time of clearance which has also been upheld by this Court. It is clear from the above that the Assessee is entitled for filing a claim for refund on the basis of credit notes raised by him towards turnover discount.

THE SUPREME COURT OF INDIA. M/s Purolator India Limited Vs Commissioner of Central Excise. Delhi – III. C. A. NO. 1959 OF 2006. Adjudged that, We were referred to the judgment of this Court in Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes), Ernakulam v. Advani Oorlikon (P) Ltd., 1981 (8) ELT 801 (S.C.), in which it was stated:- “ Cash discount is allowed when the purchaser makes payment promptly or within the period of credit allowed. It is a discount granted in consideration of expeditious payment. A trade discount is a deduction from the catalogue price of goods allowed by wholesalers to retailers engaged in the trade. The allowance enables the retailer to sell the goods at the catalogue price and yet make a reasonable margin of profit after taking into account his business expense. The outward invoice sent by a wholesale dealer to a retailer shows the catalogue price and against that a deduction of the trade discount is shown. The net amount is the sale price, and it is that net amount which is entered in the books of the respective parties as the amount realisable.” This judgment arose in the context of the Central Sales Tax Act, but it is instructive only in that it makes it clear that a cash discount is the discount granted in consideration of expeditious payment, and is therefore directly related to price.

OUR OPENION ::

The liability to pay tax is on the taxable turnover, after making permissible deductions from the total turnover. Among them are “all amounts allowed as discounts.” Such a discount must, however, be in accord with the regular trade practice of the dealer or the contract or agreement entered into in a particular case.

The registered person can issued credit note towards post sales discounts under Section 34 (2) read with section 15(3) of CGST act and can reduce the relatable tax liability on the basis of credit notes, even to an unregistered customer, having information with the registered person.

The turnover discount is known to the dealer even at the time of clearance which has also been upheld by the APEX Court. So It is clear from the above that the registered person need not pay any tax on volume discounts being a trade practice.

Disclaimer: Views and Opinions expressed in this article are the personal views of the authors. This article, the view and opinions expressed therein do not construe any suggestion or a professional or legal advice.

Authors:

S.V.S. Raghavendra Rao, Advocate & Tax Consultant, Nellore, Andhra Pradesh, Phone: 9440275175, Email: [email protected]

S.V.S.N. Sasidhar Rao, Chartered Accountant, Nellore, Andhra Pradesh, Phone: 9490087873, Email: [email protected].