In any tax law, tax has to be paid on the value which is subject to tax. In case of GST, valuation principles are relevant.
(a) To arrive at the fair value of consideration, to take out the effect of all the factors which could lead to suppression of value.
(b) To arrive at the fair value of consideration in kind or consideration other than money value.
The value which is paid or agreed to be paid by the recipient of goods and/or services to the supplier of such goods and/or services is the value which is considered for the purpose of levy of tax under GST. The value to be considered for the purpose of levy of tax is the ‘consideration’ as defined under section 2(31) of the GST Act.
Taxable value is the transaction value i.e. price actually paid or payable, provided the supplier and the recipient are not related and price is the sole consideration. In most of the cases of regular normal trade, invoice value will be the taxable value.
What transaction value will include?
As per section 15(2) of the GST Act, the transaction value shall include the following considerations/amounts-
(a) Any taxes, duties, cesses, fee and charges other than CGST, SGST, GST cess, if charged separately
(b) Amount paid by recipient w.r.t supply on behalf of supplier.
(c) Incidental expenses such as commission and packing including amount charged for anything done by supplier at or before delivery of goods.
(d) Interest, late fee or penalty for late payment.
(e) Value of subsidies linked to supply excluding subsidy by Central or State government.
In case of any goods or services, the businesses often indulge in customer friendly marketing strategies to boost or promote their sales. This generally happens by way of offering discounts or freebies or any other direct or indirect benefit. This practice is widely used in automobile sector, FMCG and consumer products and most of the dealers offer various discounts and incentives to the prospective customers. The GST law provides for special provision for exclusion of such discounts subject to stipulated conditions and nature and timing of discount. Discounts like trade discount, quantity discount etc. are part of the normal trade and commerce, therefore pre-supply discounts i.e. discounts recorded in the invoice have been allowed to be excluded while determining the taxable value.
What transaction value will exclude?
Section 15(3) provides that the value of the supply shall not include any discount which is given––
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(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; and
(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.
Discounts given before or at the time of supply will be allowed as deduction from transaction value but the condition is that such discounts should be clearly mentioned on the invoice and / or should be properly documented by way of agreement / contract / booking document etc.
In case of quantity or volume discounts, where it may not be possible to mention discount in each invoice, the agreement becomes important document.
Discounts given after supply will be allowed only if-
Let’s look at how discount will be treated in different situations.
When discount is given BEFORE supply and it is KNOWN at the time of supply
XYZ is a dealer of cars. XYZ now sells the automobile to a customer for Rs. 7, 00,000/- offering a 10% discount.
To encourage prompt payment, XYZ offers additional 5% discount, if customer pays within 7 days. Discount of 10% (Rs. 70,000/-) is mentioned in invoice resulting in net transaction value of Rs. 6, 30,000/-. However, discount of 5% is not deducted in the invoice because it will be given at the time of payment which is known at the time of supply but not certain as it is dependent upon payment. However , it can be linked to this specific invoice; the discount amount can be reduced from the transaction value.
Here, discount has been given after supply. But it was agreed upon at the time of supply and can be traced to the relevant invoice. So it may be allowed to be deducted from the transaction value.
For this, XYZ Ltd will issue a credit note to customer for Rs. 40,320/- (5% of Rs. 6, 30,000/- = Rs 31,500+ GST@ 28% on Rs. 31,500/- = Rs.8820/-), and this must be linked to the relevant tax invoice.
When discount is given AFTER supply and it is NOT KNOWN at the time of supply
XYZ offers a cash back scheme in January, 2020 where a discount of Rs. 25000 is allowed for all the vehicles booked and sold during December, 2019. In such a case, discount is announced and given after the supply was made and was not known at the time of supply. Also, it could not feauture in tax invoice as it was not known at the time of supply.
This discount was not known at the time of supply, and hence, cannot be claimed as a deduction / exclusion from the transaction value for GST calculation. Hence, the invoice value will not be netted off with such cashback incentive.
Treatment of discounts can be summarized as under:
|Discount is given||Allowed as deduction from transaction value?|
|On or before time of supply and recorded in tax invoice||Yes|
|After supply but it was known before/at time of supply and can be linked to relevant invoice||Yes|
|Given after supply but it was not agreed upon before/at time of supply (whether or not traceable to relevant invoice)||No|
Vide Circular No. 92/11/2019-GST dated 07.03.2019 , CBIC had clarified on taxability of various offer of discounts / incentives, viz, free samples and gifts , buy one get one free offer, discounts including ‘buy more, save more’ offers , secondary discounts etc.
However, this has since been withdrawn vide Circular No. 112/31/2019-GST dated 03.10.2019 to ensure uniformity in implementation.