My questions for examination in this article are

1. Whether credit note issued for reducing price towards goods supplied shall be treated as discount given or just reduce the price without treating it as discount given;

2. Whether the supplier can reduce tax liability on credit note issued for reducing price when there is no any such agreement executed prior to supply of goods for such reduction in price.

3. It is further for examination that provisions enumerated under section 15(3) of the Act in regard of discount allowed under GST shall be applied on credit note to be issued according to section 34(1) of the CGST Act.

4. It shall also be examined that such type of issued credit notes shall be treated as flowing of consideration from the supplier to the recipient.

5. It shall also be examined that such type of issued credit notes shall be treated as that such credit notes are inducing the recipient to do or not to do for the Supplier.

Credit Note Vs Discount

To solve the above said questions we analysis provisions, circulars and advance ruling in this regard.

> Section 34(1) of the CGST Act, 2017 says that “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

> Section 34(2) says that “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 September 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:

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

> Circular No. 92/11/2019-GST clarifies at para D where price reduction has been treated as secondary discount.

These are the discounts which are not known at the time of supply or are offered

after the supply is already over. For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet.

Clarification has been made on that that whether credit notes(s) under sub-section (1) of section 34 of the said Act can be issued in such cases even if the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.

It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.

It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.

In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.

There is no impact on availability or otherwise of ITC in the hands of supplier in this case.

> Circular No. 105/24/2019-GST (later on it has been rescinded later on vide circular no. 112/31/2019) clarifies as under: –

It is further clarified that if the additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer. This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer, for the purpose of arriving value of supply, in the hands of the dealer, under section 15 of the CGST Act. The customer, if registered, would be eligible to claim ITC of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer in view of second proviso to sub-section (2) of section 16 of the CGST Act.

It has been further clarified that the supplier of goods will not be eligible to reduce original tax liability then the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial / commercial credit notes have been received by him.

It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

> Advance Ruling Santosh Distributors (AAR-Kerala) dated 16-09-2019

In this case the Applicant Santosh Distributors is an authorized distributor of the company Castrol India Ltd;. The Applicant supplies goods to the dealers by giving discount on the invoice itself. The discount was given to the selected dealers as per instructions received from the company. The company subsequently reimburse the discount to the applicant distributor.

One of the questions before the Advance Ruling Authority was “Whether the discount provided by the Principal Company to their dealers through the applicant as shown in Annexure D attracts any tax under the GST laws.”

Answer to the above question is “It is established from the statement of the applicant that the prices of the products supplied by the applicant is determined by the supplier/principal company and the applicant has no control on the price of the products. Therefore, it is evident that the additional discount given by the supplier through the applicant; which is reimbursed to the applicant is to offer a special reduced price by the distributor/applicant to the customers and hence the amount represent consideration paid by the supplier of goods principal company to the distributor/applicant for supply of goods by the distributor/applicant to the customer. Therefore, this additional discount reimbursed by the supplier of goods/principal company to the distributor/applicant is liable to be added to the consideration payable by the customer to the distributor/applicant to arrive at the value of supply under Section 15 of the CGST/SGST Act at the hands of the distributor/applicant.

> Section 15(3) of the CGST Act, 2017 stipulates conditions for discount when the same (discount) cannot become part of the value of supply. Such conditions are: –

1. If discount given before or at the time of supply then such discount has been duly recorded in the invoice issued in respect of such supply and

2. If discount is given after the supply affected then such discount is given in accordance to the terms of the agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and 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.

> Section 2(31) of the CGST Act, 2017 defines Consideration as under: –

“consideration” in relation to the supply of goods or services or both includes—

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

First, I discuss whether provisions enumerated under section 15(3) of the Act in regard of discount allowed under GST shall be applied for credit note to be issued according to section 34(1) of the CGST Act.

I observe that provisions stated for credit note under section 34(1) of the Act are independent provisions. Such provisions of section 34(1) have no link with provisions as stated for discount under section 15(3) of the Act. If a person issues a credit note according to section 34(1) read with section 34(2) of the CGST Act, 2017 then provisions stated under section 15(3)(b) for execution of agreement before or at the time of supply shall not be applied. There may be cases where credit notes are issued for allowing discounts then in those cases conditions as stated under section 15(3)(b) should be fulfilled. Thus, if the credit note has no concern with discount then in that case provisions of section 15(3)(b) shall not be applied.

Section 34(1) of the CGST Act allows to issue credit note in following cases: –

1. When there is a case of excess charged of taxable value;

2. When there is a case of excess charged of tax payable;

3. When there is a case of goods returned by the recipient;

4. When there is a case of goods found deficient.

Circular No. 92/11/2019-GST discuss and clarify on secondary discount. The circular reduces in price treats as secondary discount. My observation is that why reduction in price should be treated as secondary discount. Reduction in price may be done on various reasons which are provided as under. If the price reduction has been done in normal course of business and/or it (reduction in price) has been done due to other reasons why such reduction in price should be treated as discount and provisions of section 15(3) of the Act should be applied. Therefore, if there is no case of discount while issuing credit note then fulfillment of provisions as required under section 15(3) of the Act should not be required.

Circular No. 105/24/2019-GST, which has been withdrawn later on, discuss on consequences if additional discount is given by the supplier of goods in lieu of consideration for any additional activity /promotional campaign to be undertaken by the dealer.

This circular also clarifies if the post-sale discount is given by the supplier of goods to the dealer without any further obligation or action required at the dealer’s end, then the post sales discount given by the said supplier will be related to the original supply of goods and it would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act.

It further clarifies that if the additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer.

It further clarifies that if section 15(3)(b) not applicable on transaction of discount then whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial / commercial credit notes have been received by him. It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

The clarifications and contents given in the said Circular No. 105/24/2019-GST are correct and have no concern for credit note to be issued under section 34(1), therefore, no such comments are required for credit note to be issued under section 34(1) while consider this circular.

Advance Ruling Santosh Distributors (AAR-Kerala) dated 16-09-2019 This advance ruling held on one of the facts that if discount has been reimbursed by the parent company to the distributor then it should be treated as flowing of consideration which (consideration) should be taxable in the hands of distributor. There is no observation given by the Hon’ble Authority on credit note issued in the normal course of business and issued unconditional, therefore, it (advance ruling) should not be applied on such issued credit notes.

Now it is concluded if a GST credit note has been issued to reduce in rate of goods supplied under following reasons then output put tax liability can be reduced by the supplier subject to other conditions that the same had been issued within time prescribed under section 34(2) and the recipient has reversed input tax credit against this credit note. Reasons for issuing credit notes may be as under: –

1. It has been issued in normal course of business or

2. It has been issued unconditional or

3. It has been issued to correct the price in supplied goods which (price) has been inadvertently charged excess in supplied goods or

4. If there is no such inducement by the supplier given to the recipient before issuing such credit note or

5. If there are compelling situations such as to save the business from competition, or to clear the out of fashion or obsolete stock or to boost the sale in such situations like covid-19 pandemic.

6. If such credit note has not been issued in account of pass the consideration to the recipient in account of any direct or indirect service to be provided by the recipient to the supplier.

Thus, if a credit note is issued due to the above said situations then, there is no such case that the supplier requires post sale agreement to issue the credit note, there is no such case that it shall be deemed that the supplier is paying consideration to the recipient towards supply of service directly or indirectly by the recipient to the supplier and/or there is no such case that the suppler is inducing the recipient before issuing the said credit note.

To reach to me for any suggestions, rectifications, amendments and/or further clarifications in regard of this article my email address is pkmgstupdate@gmail.com.

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One Comment

  1. KASHU PATEL says:

    In case Discount given to dealers of automobile sector and the same is given for sales promotion, Marketing, Advertisement (i.e. Dealer has some obligations to do) than what we can do???

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