The practice of providing discount is one of the very old and well-established strategies which the business houses have been adopting in order to entice and persuade their customers towards buying more goods from them. At large, there are two types of discounts being offered by the industries i.e. Cash discount and Trade discount.
Cash vs Trade Discount
A cash discount is a deduction allowed by the seller of goods in order to motivate its customers to pay within a specified time. In other words, this discount is given in exchange for the buyer making the payment earlier. The amount of cash discount is usually a percentage of the total amount of the invoice, but it is sometimes stated as a fixed amount.They are generally reflected on the credit side of the Profit & Loss Account of the dealer.
A trade discount is a deduction allowed by the seller from the list price of the goods in order to motivate its customers purchase more. Generally, these types of discounts are provided periodically or on completion of the pre-decided term. They may be new customer discount, quantity/turnover discount, year end discount, target discount, bonus and many more. They are generally reflected in the credit side of the Trading account of the dealer.
Trade discount could be provided by two methods:
A. On the Invoice i.e. at the time of sale itself–Under this method, trade discount is calculated at the time of sale by deducting the list price of the goods and VAT is calculated on the net value of sale. For instance – The list price of the good is INR 1100 and dealer provides INR 100 discount. Thus resultant price comes to INR 1000, on which it charges 5% (say) VAT on INR 1000 i.e. INR 50. The dealer is obliged to deposit INR 50 to the State Government and purchaser is entitled to claim input tax credit (‘ITC’) of INR 50 on the basis of the invoice.
B. Post issuance of Invoice i.e. through credit note– As per this method, trade discount is offered to the dealer after the event of sale, through a credit note. For instance –if after issuance of the invoice amounting to INR 1050 (including tax INR 50), dealer offers trade discount amounting to INR 100 on the list price offered in the Invoice, resulting price comes to INR 900 and issue credit note amounting to INR 100.The dealer is entitled to make tax adjustment amounting to INR 5 (50-45) and consequently ITC claimed by the purchaser is required to be reversed by INR 5.
On the downside, however, such discounts end up being cost to the dealer often because adjustment of the tax on the credit note is disallowed owing to confounding treatment meted out to them by the various state VAT laws and judicial pronouncements.
Characteristics of Trade Discount
In one of the judicial pronouncements of DCCR v. MRF Ltd(2008) 14 VST 124, theHon’ble Tribunal of West Bengal laid down the guidelines for identification of the trade discount. The relevant portions of the judgment have been reproduced below:
1. The discount is to be an integral part of transaction of sale itself. Thus should be related to the price of the goods sold and it cannot have any relation to any other goods supplied or service rendered.
2. The invoice should at least reflect that the discount is allowed or will be allowed.
3. A discount which is in the nature of compensation for any loss suffered by the purchaser in the previous purchase is not a trade discount.
4. Discount allowed long after the invoice is raised and/or removal of goods which is in the nature of bonus or incentive is not a trade discount.
5. The outward invoice sent by a wholesale dealer to a retailer should show the catalogue price and the deduction of the trade discount.
6. The object of allowing trade discount is to enable the retailers to earn profit by selling the goods at the catalogue price and sale price payable by the retailer will be the difference between the catalogue price and trade discount.
7. There will be only one agreement between the parties to the effect that the goods will be sold by the dealer to the retailer at the net sale price calculated after allowing the discount and trade discount is to be deducted from the catalogue price in accordance with the terms of that agreement only.
8. Net amount of sale price after deduction of the discount will be entered in the sale book of the dealer and net amount of price payable by the retailer after deduction of the discount will be entered in the purchase book of the purchaser (retailer).
9. Trade discount should be known and understood at or before the time of removal of the goods and trade discount as a rule does not appear in the books of the seller or the purchaser.
10. Trade discount need not be always allowed at the time of sale and may be allowed on a later date at the end of the month or quarter if computation of discount was not possible at the time of making the invoice.
Treatment in States
The genesis of conflict between a dealer and the respective state revenue department lies wherein trade-discount is provided by the dealer through credit note i.e. post issuance of invoice. As per present States VAT laws, a dealer is required to calculate and pay VAT on the basis of ‘taxable turnover’ and most of the state defines the term ‘taxable turnover’ as ‘turnover’ on which the dealer is liable to pay tax. Further, the term ‘turnover’ is defined as the sum total of the ‘sale price’ receivable or received by the dealer, after carrying out adjustments as prescribed. The term ‘sale price’ has also been defined under most of the state VAT laws to mean the amount paid or payable to a dealer from sale of goods. However, most VAT Acts neither have a definition of the term ‘discounts’ nor do they provide any guidelines for administration of these discounts by the dealers and thus leading to the inconsistency in treatment of trade discount.
Thus, it can be conveniently concluded that the issue of trade discount post issuance of invoice is a complicated one primarily because every state law has interpreted the issue differently and has given a meaning of its own to such transactions. On one hand, some states have been lenient in giving the tax benefit to such discounts, while on the other, the rest of them have treated the issue with impunity and harshness and have proved to be tax unfriendly.
Judicial Pronouncements – The ambiguity persists
Over the years, various judicial pronouncements have made the already complicated issue even more complex. Since, there has been no uniform view adopted by the courts on the given subject, the matter still requires to be explored. The same has been further discussed below:
I. Trade discount through Credit Note
In IFB Industries Ltd. v. State of Kerala(2012) 4 SCC 618, it was held by the Hon’ble Supreme court that trade discount are allowable as deduction even if not shown in the invoice but given separately by credit note. Further, same view is taken in T V SundaramIyengar v. State of Karnataka (2012) 51 VST 249 (Kar HC DB), State of Karnataka v. Reliance Industries Ltd. (2012) 51 VST 274 (Kar HC DB), Nagarjuna Fertilizers v. ACCT (2012) 51 VST 453 (WBTT) and Pratham Motors p Ltd. v. ACCT (2014) 71 VST 522 (Kar HC DB).
There is alsocontrarydecision to the above i.e.Crompton Greaves v. ACCT (2013) 61 VST 5 (Cal HC DB) and State of Karnataka v. ELF Gas (2014) 47 GST 347 (Kar HC DB)
II. Year End Discount
Quantity rebate allowed as discount by dealer through credit notes at end of the year as per scheme is allowable as deduction held in Godavari fertilizers v. CCT (2004) 138 STC 133 (AP HC DB) and State of AP v. T V SundaramIyengar (1987) 65 STC 41 (AP HC DB)
III. Trade discount should be provided as per pre-defined scheme at the time of sale
In case of Crompton Greaves Ltd v. Assistant Commissioner of Commercial Taxes, Corporate Div& Others.,it was held that dealer had realized the full price with the sales tax and surcharge without any mention of discount being allowed in any manner whatsoever. It was not a discount, which was known and understood at the time of removal of the goods. There was no whisper in the invoices as to discount being allowed. No recurring credit scheme was also introduced to allow the purchasers to get the discount through the credit notes. It was not turnover discount through issuance of credit notes to encourage turnover of sales.
IV. Trade discount allowed even if cash discount is mentioned in the law
Apart from all the above mentioned pronouncements, the decision held in the case of Deputy Commissioner of Sales Tax v. Advani Oerlikon (P) Ltd. 45 STC 32 (SC)spices up the confusion even more, in this case Hon’ble Supreme Court held though only cash discount is mentioned in the definition of ‘sale price’ section 2(h) of CST Act, even trade discount allowed are also to be reduced from sale price. It is observed that a trade discount is a deduction from the catalogue sale price of goods, allowed to customer. The net amount is the sale price, and it is that net amount which is entered into the books of the respective parties as the amount realizable.
Thus, it becomes very difficult for the companies with pan-India presence and centralized billing system to grant such trade discounts to the respective wholesalers or dealers across different states owing to lack of clarity on the issue. Furthermore, since every state tax authority verifies the transaction based on respective state VAT laws, it often results in multifarious disputes at every level resulting in huge litigation costs for the companies.
Further, many times it has been observed by the department that dealer providing trade discount vide credit note takes the benefit of tax but the same tax is not reversed by the purchasing dealer, leading to tax injury to the department. Moreover, in most of the cases sellers and purchasers are registered in different wards and it becomes very difficult for the assessing officer to confirm reversal of tax by the purchaser on which seller have already taken the benefit. Thus, to avoid such tax evasion, department is becoming bit harsh in providing benefit of tax on discount provided vide credit note.
Win-Win situation for State department
Due to the confounding treatment by various States laws and judicial pronouncements as stated infra, business houses operating pan-India through SAP started becoming very reluctant in reversing output tax on the credit note.This will not only save the business houses with the unnecessary litigation cost but it will also ease up the difficulty of treating tax reversal in SAP differently for different states as Central excise also does not require such reversal. At present, business houses only state the value of credit note in the statutory return without taking any tax benefit on the same.
Moreover, in many cases it has been observed that,basis the credit notes (whether including tax or excluding)details stated by the seller in the statutory return, department have issued notices to purchasers for reversing ITC on the same. At last, purchaser is required to reverse the ITC claimed whether the same is allowed to the seller or not.
Unequivocal stand in GST
Recently, on 14 June 2016, NDA Government has put forward Draft Model GST Law (‘Draft GST Law’), wherein the Finance Ministry tried to establish unambiguous view on key litigative issues. Fortunately, the issue of providing trade discount post issuance of invoiceis taken care off in Draft GST Law. As per section 15(h), any discount or incentive linked to the invoice which is offered post-supply shall not be a part the transaction value, provided discount offered is as per the agreement and is known at or before the time of supply of goods. The relevant portion of is produced below:
“The transaction value under sub-section (1) shall include:
(h) any discount or incentive that may be allowed after the supply has been effected:
Provided that such post-supply discount which is established as per the agreement and is known at or before the time of supply and specifically linked to relevant invoices shall not be included in the transaction value.”
Thus in the era GST, a dealer who is offering trade discount post issuance of invoice need to take care of the followings, for getting the tax benefit of the credit note:
Authored by Nimish Goel who is a Partner and Head of Indirect Tax/GST with International Business Advisors. Nimish has a vast experience of more than 13 years in Customs, Excise, Service tax and VAT. Nimish has been a part of EY India and then with KPMG in Europe where he learnt the nuances of GST and is a regular author of articles on issues related to indirect taxes including GST. For any professional assistance, he can be reached on [email protected]. Nitesh Gupta, Assistant Manager, assisted him in this article.