1. Preamble: There is a lot of confusion on deduction under section 15 with respect to the discounts. Discounts are offered by various businesses to boost sales. In this article an attempt has been made to summarise the tax treatment (pre-GST and GST regime) on such discounts.
2. Meaning of Discount: Discount has not been defined under The GST law but is allowable as reduction from the transaction value subject to conditions mention u/s 15(3) of CGST/ SGST Act, 2017. The authors are of the view that it is imperative to understand and establish the meaning of discount. Only then one will be able to determine the nature of the reduction in the value of supply and appropriately categorise the reduction either as ‘discount’ qualifying for reduction in transaction value or as ‘consideration’ for supply by the recipient.
2.1. Lord M’Laren in Buchanan V Macdonald, 33 SLR 200 held as follows: Discount has no technical or universal meaning. It is used in a sense for abatement which is given on a debt because payment is made at an earlier date than it was customary for such debts to be paid (cash discount).
2.2. International Accounting as per P. Ramanatha Aiyar defines Sales Discount as Discount on invoice price given by a seller of goods or services (usually in return for bulk purchases or prompt payment)
2.3. In Brown V. National Provident Institution, (1921) 2 AC 222, it was held that discount is in the Oxford English Dictionary defined in its primary meaning, as an abatement or deduction from the amount, or from the gross reckoning or value of anything, and, as used in commerce (1) is defined to mean a deduction made for payment before it is due of a bill or an account; or any deduction or abatement from the nominal value or price (2) the deduction made from the amount of a bill to one who gives value of it before it is due.
3. Types of discounts: The businesses and trade practices have adopted various methods to pass on the discounts depending on the nature of the business. While certain businesses offer a cash discount, certain others pass on the discounts based on the periodical turnover. Trade call this in different nomenclature. All reduction in price is not discount, even if trade calls it as discount. It also important to note that merely because the nomenclature of discount is employed, the reduction in taxable turnover is not possible. Hence, the covenants of the transaction needs to carefully verified/ checked before claiming deduction under S.15(3) of CGST/SGST Act, 2017.
4. Pre-GST regime – Taxability of discounts: The taxability of discounts either under the GST regime or pre-GST regime is based on satisfaction of certain conditions specified in this regard. In other words, the discounts will form part of the taxable value / assessable value in the event the conditions specified under the statute are not satisfied. The tax treatment on discount under the erstwhile laws viz., Central Excise, Service Tax and VAT laws are discussed in the following paragraphs:
4.1. Central Excise: Under the Central Excise, the duty was levied in terms of Section 4 on the transaction value if the price was the sole consideration and the assessee and the buyer were not related. The term ‘ transaction value’ was defined to mean the price actually paid or payable for the goods, when sold, and include in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. Therefore, it was inferred that the discount, if any offered to the buyer does not form part of the ‘transaction value’ and accordingly, would not be subjected to the central excise duty. However, the situation and the purpose for which the discount was offered had become the subject matter of debate and litigation. In this regard, it would be relevant to refer to certain judgments for better apprehension of the tax treatment on discounts under the erstwhile Central Excise laws:
4.1.1. Cash discount offered for prompt payment of consideration is not liable to duty – Advani Oerlikon (P.) Ltd. v. UOI (1980) 45 STC 32 (SC) also refer CBE&C circular No. 643/34/2002-CX dated 1-7-2002;
4.1.2. Discounts offered by an assessee should be on rational basis and not on extraneous considerations which should be justified with certain valid reasons – Kirloskar Brothers Ltd. v. CCE 181 ELT 299 (SC);
4.1.3. Turnover discount offered later by way of issuing credit note showing the amount of duty along with the value of discount is allowable as deduction and accordingly, not liable duty – CCE v. Addison & Co. 339 ELT 177 (SC);
4.1.4. Quantity discount allowed by way of offering more quantities without charging additional price on pre-determined basis is in the nature of trade discount and therefore, not liable to duty – CCE v. Hindustan Lever 2002(142) ELT 513 (SC);
4.1.5. The CBEC vide Circular No. 354/81/2000-TRU dated June 30, 2000 has clarified that the discounts of any description offered by the manufacturer / assessee shall not form part of the transaction value. It was also clarified that the turnover discounts / year-end discounts are also not liable to duty provided the assessee discloses the intention for allowing such discounts.
It is apparent from the judgments cited supra that under the provisions of Central Excise law, all the classes of discounts viz., pre-determined, offered at the time of removal and post-removal discounts were not liable to duty, provided such discounts do not confer any additional obligations on the part of the buyer and the intent behind such discounts are justifiable.
4.2. Service tax: In terms of Section 67 of the Finance Act, 1994 the value of taxable services in case of money consideration is the gross amount charged. The term ‘consideration’ is defined to include any amount that is payable for the taxable services provided or to be provided and any reimbursement or cost incurred by the service receiver. The term ‘gross amount charged’ is defined to include any amount received towards the taxable service before, during or after provision of such service. The Finance Act, 1994 do not refer to the discounts offered by the provider of service and the tax treatment thereon. Therefore, with reference to the valuation provisions as referred supra, it can be deciphered that service tax is leviable only on the consideration which should be the gross amount charged excluding the discounts offered by the service provider. In this regard, a reference can be made to the clarification issued by the CBEC vide Letter F.No.341/34/2011-TRU dated 31-3-2011 wherein it is clarified that if the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver. However, concession is not available for bad debts. Therefore, it can be safely concluded that discounts either pre-determined or at the time of provision or post-provision of service where the contract value is renegotiated on justifiable grounds is not liable to service tax.
4.3. VAT: Under the erstwhile State VAT laws, the discount offered by the seller was allowable as eligible deduction provided such discount is indicated on the tax invoice issued for sale of goods and such discounts are in accordance with the regular practice of the dealer or the terms of any contract or agreement entered into in a particular case (reference Rule 3(2)(c ) to the Karnataka VAT Rules, 2005). With specific reference to the Karnataka VAT laws, the provision relating to issuance of credit notes and debit notes were omitted with effect from April 01, 2012. Accordingly, in case of post-sale discount / year-end discounts, the seller was unable to issue the credit notes and adjust the tax paid / payable on such sale transaction after effecting the sale. As such, the discounts issued after effecting the sale did become the subject matter of various litigations. However, the Hon’ble Supreme Court in the case of M/S. Southern Motors Vs. State of Karnataka and Ors reported 98 VST 207 held that the discounts offered after effecting the sale of goods and which is supported by the valid relevant documents are not liable to tax under the provisions of Karnataka VAT Act, 2003. In this backdrop, while it can be concluded that the post-sale discounts based on the quantity sold or turnover based discounts are not liable to tax, the eligibility for deductions would be based on the specific provisions prescribed under the respective State VAT laws.
5. Taxability under GST:
The taxable value of goods or service or both shall be the transaction value, which is the price actual paid or payable for the said supply of goods or services or both where supplier and the recipient of supply are not related and price is the sole consideration for the supply. And include
i. Taxes, duties, cesses, fees, and charges other than CGST, SGST, UTGST, IGST, and GST compensation cess.
ii. Any amount that the supplier is liable to pay in relation to such supply, but which has been incurred by the recipient of the supply, and not included in the price actually paid or payable.
iii. Incidental expenses like commission, packing and any amount charged by supplier to the recipient for anything done by the supplier in respect of good or service or both at the time of, or before the delivery of goods or supply of service.
iv. Interest or late fees for delay in payment of consideration.
v. Subsidies directly linked to the price excluding subsidies provided by the Central Government and State Government.
But the taxable value shall not include any DISCOUNT offered–
i. Before or at the time of supply – the tax invoice should indicate the amount of discount;
ii. Subsequent to supply (post-supply discount) – following are the conditions:
a. discount offered should be established in terms of the agreement between the supplier and recipient;
b. discount should be linked with the original supplies and tax invoices; and
c. the recipient should reverse the input tax credit attributable to such discounts;
The statutory provisions relating to allowability of discounts are depicted in the pictorial diagram infra.
It is apparent from the above provision that the discount whether it is pre-determined or offered at the time of supply or post supply discount will not be liable to GST, provided the specified conditions discussed supra are satisfied. In respect of the post supply discount is concerned, credit note to be issued in accordance with Section 34. Such credit note should be issued within the month of September following the end of financial year in which supply is made or the date of furnishing the relevant annual return, whichever is earlier. Therefore, on conjoint reading of the provisions, it is obvious – that the post supply discount should be offered within September following the end of financial year in which supply is made or the date of furnishing the relevant annual return, whichever is earlier. In this backdrop of legal provisions, the form in which the discount is offered would be of relevant since, the term ‘discount,’ many times used to pay consideration for concealed transaction. Therefore, one should understand the purpose and intent of the supplier and the recipient when discount is offered. Following are the few scenarios in this regard:
5.1. Post-supply discount issued as incentive with certain obligations on the recipient viz., to undertake special sales drive, advertisement campaign, exhibition etc.: Precisely, the allowance provided, although passed on as discount would qualify as consideration to undertake certain obligations conferred on the recipient. Therefore, undertaking such obligations as per the directions of the supplier would qualify as independent supply and the amount passed on as discount would qualify as consideration for such supply. In this regard, reference of Entry 5(e ) to Schedule II can be drawn which reads as ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’. Accordingly, in such a scenario, the recipient in the original supply should issue a tax invoice in relation to receipt of consideration and as such, issuance of credit note by the original supplier would be termed inappropriate. In spite of that numerous businesses are continuing to issue credit notes. To illustrate, a manufacturer-supplier has agreed to reimburse the salary of one salesman to the dealer for promoting the sales and the marketing of the product. Such a reimbursement is offered by issuing credit note as discount. In this scenario, the recipient is receiving concession towards the additional efforts of promoting sales and marketing. Therefore, the original recipient, in such an instance is supplying services involving sales promotion and marketing. Therefore, the original recipient should issue a tax invoice with respect to such supply.
In this regard, it is relevant to note that the term ‘consideration’ is defined to include ‘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’. Therefore, the question that would arise at this instance is whether the act of a recipient for a consideration or otherwise would be taxable in the hands of supplier or recipient? Nevertheless, an act or forbearance or obligation to do an act would be taxable and the concession offered by the supplier to the recipient in this regard may not qualify as discount. Accordingly, the purpose and intent behind the discount would become relevant in such a scenario.
5.2. Additional discount is offered by the original supplier of goods to the recipient as compensation, for further supply of goods to end-recipient at lesser than the value of original supply: Generally, the compensation provided by the original supplier which is equivalent to the loss incurred by the recipient for further supply of goods to end-recipient is passed on as discount. This practice is prevailing in automobile sector and in e-commerce sector. With reference to the definition of ‘consideration’ as discussed in para 5.1. supra, this would not qualify as discount even though there exists an agreement between the original supplier and recipient. The amount passed on as discount to the recipient by the original supplier would form part of taxable value and accordingly, would be liable to GST. For example, a mobile phone supplied by the recipient to the end-customer at Rs. 40,000/- in lieu of normal selling price of Rs. 45,000/- wherein the difference of Rs. 5,000/- to be borne by the original supplier which is passed on by issuing credit note would qualify as consideration for the recipient. Accordingly, the recipient would be liable to pay GST at applicable rate on Rs. 45,000/-.
5.3. In view of the above analysing covenant terms as stated infra is important.
5.3.1. List of conditions to be satisfied by buyer to get qualified for discount.
5.3.2. Activities that need to be performed by the buyer,
5.3.3. Documents related to such activities.
5.3.4. Nexus of supplementary activity with original transaction.
5.3.5. Time of agreeing such terms.
5.3.6. Time of passing such discount.
To arrive at the proper tax conclusion all the above terms of covenant to be analysed in detail.
Example: A manufacturer-supplier has agreed to reimburse advertisement expenses incurred by the dealer through credit note. Advertisement bills are in the name of Manufacturer. As stated in above para 5.3.3, documents related to such activity to be analysed before arriving at conclusion. In the present case advertisement bills are in the name of manufacturer. Hence it is pure financial transaction and GST is not applicable.
5.4. Credit note is issued to the buyer, who is eligible for discount. If supplier is eligible for deduction as discussed supra, then he will reduce his taxable supply by issuing credit note as per section 34. Otherwise suppler will issue financial credit note without reducing taxable supply. Financial credit note is an official intimation or memo to addressee about crediting his personal ledger in issuers books of accounts.
5.5. Question may arise whether recipient / buyer should reverse input tax credit according to second proviso to section 16(2) due to non-payment of entire consideration within 180 days. Example original supply value Rs.1000 plus IGST of Rs.180. Suppler have given post sale discount not eligible for deduction of taxable supply in accordance with 15(3). hence supplier has issued financial credit note for Rs.200. Buyer has paid Rs.1000+180-200=980. Let us analyse whether buyer needs to reduce the input tax credit paid on Rs.200. Second proviso to section 16(2) “where the recipient fails to pay to the supplier of goods or service or both, ………………, the amount towards the “VALUE OF SUPPLY” along with the tax payable thereon within 180 days………… shall be added to output tax liability…………………..”
In the above proviso words used is “value of supply” and not taxable value of supply. Hence payment net of discount along with tax is enough to comply second proviso to section 16(2). Similar view is also expressed by Appellate Authority of Advance Rulings in the case of MRF Ltd.
6. Certain Circulars and clarifications: CBIC have issued various Circulars clarifying the tax treatment on discounts under various scenarios. The gist of certain relevant Circulars in this regard are as follows:
|Sl. No.||Particulars||Tax treatment||Impact on Supplier||Impact of buyer (Dealer)|
|1||Free samples and gifts||No consideration hence not a supply subject to schedule I||ITC reversal as per section 17(5)(h), if tax paid under schedule I, no reversal of input tax credit.||If supplier has paid tax under schedule-I then ITC is available otherwise it is an ineligible ITC|
|2.||Buy one get one free offer||It can at best be treated as supplying of two goods for the price of one. Hence, Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.||ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers||ITC shall be available to the buyer.|
|3||Discounts including ‘Buy more, save more’ offers:|
|(a)||Such Discount shown in Invoice itself.||Discount should exclude to determine the value of supply||Tax should be charged on net price after deducting discount amount.||ITC available on such purchases to the extent charged on the invoice.|
|(b)||Few suppliers offer periodic / year-end discounts||Discount should be excluded to determine the value of supply, only if Section 15(3) conditions are satisfied including reversal of ITC by recipient of supply.||If 15(3) condition including reversal of ITC by recipient are satisfied, then taxable value can be reduced to the extent discount, else taxable value cannot be reduced.||If supplier has issued credit note in accordance with section 34, satisfying conditions given under section 15(3) then recipient need to reverse ITC, otherwise not required (not required even under second proviso to Section 16(2)|
|(c)||Secondary Discounts (These are the discounts which are not known at the time of supply or offered after the supply is already over)||Supplier can only issue commercial credit note. Taxable value of supply cannot be reduced.||Cannot issue credit note with GST. Only commercial credit note can be issued.||No impact on ITC, even under second proviso to section 16(2). r/w Circular No/105|
6.2. Circular No. 105/24/2019-GST dated 28-06-2019: This circular No. 105/2019 has been withdrawn ab-initio, vide circular No.112/31/2019 dated 3rd Oct 2019 stating, “Numerous representations were received expressing apprehensions on the implications of the said circular.”
6.3. What is circular? Circular is an instruction or direction issued by the board to the central officer under section 168 of the Act for the purpose of uniform implementation of the Act. It is binding on the officer and not on taxable person. What is the legal position of circular? Circular is just an instruction to officer by the board. It cannot override notification, Rules & Act.
6.4. What is the legal implication if circular is withdrawn? As stated supra, it is just an instruction to central officer. Hence it means instruction is withdrawn. Binding effect on the officer is removed. He can dispose the case as per his understanding of the law or in line with the circular. Hence it is worth discussing circular No. 105/2019 infra
|Sl. No.||Particulars||Tax treatment||Impact on Supplier||Impact of buyer (Dealer)|
|1||Post-sale incentive requiring the dealer to do certain acts like undertaking special sales drive, advertisement campaign, exhibition etc.||Such transaction would be a separate transaction and the additional discount will be the consideration for undertaking such activity and therefore, it would be in relation to supply of service by dealer to the supplier of goods. Hence dealer should issue tax invoice, should not be adjusted with credit note.||Regarded as new inward supply of service. Eligible to take ITC charged by dealer.||Separate outward supply by dealer, should issue tax invoice to supplier of goods.|
|2.||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.||Discount relating to original supply. Tax treatment is based on the fulfilment of condition given under section 15(3)||If conditions given under section 15(3) are fulfilled, then supplier can reduce his taxable turnover. Otherwise he needs to issue commercial credit note without reducing taxable supplies.||If conditions given under 15(3) are fulfilled, then he need to reverse his original ITC to the extent of credit note issued by supplier. Otherwise ITC need not be reversed even under second proviso to Section 16(2)|
|3||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.||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||Not eligible to take credit of excess tax paid by dealer on his outward supplies in relation to price subsidy given by supplier.||Tax should be discharged on total consideration (i.e. amount collected from customer plus price compensated by supplier). Loss of ITC to the extent of price compensated.|
Example: Manufacturer sells goods to dealer at Rs.90 plus Tax and dealer is required to sell the goods at 100 plus tax to end customer. During end of sale season manufacturer instruct dealer to sell the goods at Rs.50/-plus tax and promises to give credit note for Rs.50.
As per the above circular the dealer is liable to discharge tax on Rs. 100 (consideration received from customer Rs.50 plus consideration received from manufacturer Rs.50) but customers are eligible to take credit only on Rs.50 due to second proviso to Section 16(2). Also, invoices are issued to customers hence manufacturers are also not eligible to take credit on balance Rs.50/-
7. Certain relevant advance rulings: The Authority of Advance Rulings in the case of MRF Ltd., has pronounced conflicting rulings in two different cases. In the first instance, the Authority of Advance Rulings for the State of Tamil Nadu pronounced that the recipient is not entitled to claim input tax credit attributable to the post-supply discount with reference to the condition stipulated under Section 16 – that the recipient would not affect payment of consideration to the extent of discount passed on by the supplier. On an appeal before the Appellate Authority of Advance Ruling, has held that the recipient is entitled to claim the whole of input tax credit of GST as indicated on the invoice – refer Order No. 5/AAR/2019 of the Authority of Advance Ruling Authority dated 22.01.2019 and Order No. AAAR/04/2019 (AR) dated 24.06.2019.
8. Conclusion: there are many issues prevailing under GST. As far as tax treatment on discount is concerned, GST law have specified the provisions unambiguously. Provisions with respect to discount to be applied carefully based on the facts of each transaction to decide the taxability of the same.
I personally Thank and Acknowledge inputs given by “Bangalore GST Study Group”