GST liability on Discount through Commercial Credit Note & Debit Note

Understand GST liability on discounts via commercial credit/debit notes. Learn about relevant sections, circulars, and judicial rulings for tax applicability.

GST officials have started to conduct audit under section 65 of CGST Act 2017 of various tax payers and facing the issue related to GST applicability on discount income. We will understand the provisions related to GST applicability on discount income received at the time of supply of goods or services or both and discount received after such supply through commercial debit / credit note.

Before understand the provisions under the GST law related to issuing credit note and debit note, first we take an example, suppose a company is in the business of trading and distribution of Goods. Such company purchased the goods directly from manufacturer in bulk quantity on the prices and payment terms mutually decided between both the parties. The said transactions are duly materialized with all the required documents such as Tax Invoices, e-invoicing and e- way bills issued by the manufacturer along with GR issued by the transporters. Input Tax Credit (ITC) is being also availed by the company on the basis of these documents. All documents are in orders in terms of GST provisions.

There are some incidences on the basis of that company later on get discount form the manufacturer. The incidences are trade discount of early payments i.e. making payment before the due date, discount on price protection, discount for selling bulk quantity i.e. selling quantity more than targets accepted by company, target incentives, etc. Commercial Credit Note have been issued in favour of the company with respect to the said discount given by such manufacturer and against that company issues Commercial Debit Note in favour of such manufacturer. No GST is being charged on said Commercial debit Note by the company.

Now the question is whether company is required to charge GST on the Commercial Debit Note issued in respect of discount received from their manufacturer ?

Before reaching to the conclusion on the above issue, we should understand the facts of the above example which are as under:

i. The company is the distributor of various reputed & branded companies (manufacturer) and purchasing the goods in bulk quantities from them on the price and payment terms mutually decided.

ii. The company receives discount on early payment i.e. payment made before the due date.

iii. The company also get discount on fulfilment of some criteria and achieving some targets.

iv. In all the above cases discount components are not known at the time supply of goods made by supplier to the company. Hence such discount may be called as secondary discount.

v. Commercial Credit Notes towards discount or incentives are being issued by respective manufacturer to the company.

vi. The company has also issued commercial debit note against the commercial credit note issued by manufacturer.

vii. No GST has been charged by the company on the said Commercial debit note nor any credit of ITC taken by the manufacturer on the basis of such debit note issued by the company.

Now we understand the statutory provisions under the GST law which are relevant on the above facts are as under:

a- Section 34 of the CGST Act, 2017 state that credit note are passed u/s 34 of the CGST Act in case of

• Taxable Value and Tax charged is more than that payable or
• Deficiency in Goods or Services or both or
• Sales Return

b- In Business, GST Credit Notes under 1st Limb are passed for Post Sale Discounts were

• There is a pre-sale agreement.
• The Credit Note can be linked to original invoice
• The recipient has reversed the ITC.

c. In case the above transaction has not passed the Triple Tests as above, a commercial (Non-GST) Credit Note should be issued.

d. Circular No. 92/11/2019-GST dated 07.03.2019: Clarification of various doubts related to treatment of sales promotion schemes under GST.

This circular clarified on the treatment of sales promotion scheme under GST as

A. Free samples & Gifts,

B. Buy one get one free offer,

C. Discounts including ‘Buy more save more’ offers,

D. Secondary Discounts

The relevant extract of above circular i.e. “Secondary Discount” is reproduced as under:

i. 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.

ii. The provisions of sub-section (1) of section 34 of the said Act provides as under: “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.”

iii. Representations have been received from the trade and industry 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.

iv. 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.

v. In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) 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.

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

e. No ITC is reversal is required. The same has been held by the Tamilnadu Appellate Authority for Advance Ruling (AAAR) in the case of MRF Limited.

f. The advance ruling advanced by the Hon’ble Authority of Advance Ruling, Karnataka in the case of M/s Kwality Mobikers Pvt Ltd [No. KAR ADRG 76/2018 dated 24.09.2019 that:

• The volume discount received on purchase in the form of credit note without any adjustment of GST is not liable for GST.
• The volume discount received on retail (on sale) in the form of credit note without any adjustment of GST is not liable for GST.
• Since the amount received in the form of credit note is actually a discount and not a supply by the applicant to the authorised supplier, the applicant need not issue tax invoice for this transaction.

g. Authority for Advance Ruling, Madhya Pradesh on the application filed by Rajesh Kumar Gupta proprietor of M/s Mahaveer Prasad Mohanlal, Gandhi Ganj, Jabalpur (M.P.) [Case No. 07/2021 order dated 06.01.2022] has held that:

• The applicant can avail the Input Tax Credit of the full GST charged on the invoice of the supply and no proportionate reversal of ITC is required in respect of commercial credit note issued by the supplier for cash discount for early payment of supply invoice (bills) and Incentive/scheme provided without adjustment of GST, if the said discount is not covered under Section 15(3)(b) of CGST Act, 2017 and the said discount is not in terms of prior agreement. This is subject to the conditions that the GST paid for the said goods/service is not reversed or reimbursed / re-credited by the supplier to the applicant in any manner.
• Since the amount received in the form of credit note is actually a discount and not a supply by the applicant to the supplier, no GST is leviable on receiver on cash discount/incentive/scheme offered by the supplier to applicant through credit note against supply without adjustment of GST.
• The ruling is valid subject to the provisions under section 103(2) until and unless declared void under section 104(1) of the GST Act.

Author’s view:

In view of the above facts, provisions under the GST law, circular and judicial pronouncement, it can be concluded as under:

There is no need to charge GST on the commercial debit note issued by the company in respect of secondary discount received from their supplier through commercial credit note issued by them. In the present case, the value of discount is not known at the time of supply of goods. Hence known as secondary discount.

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Disclaimer: The above views and contents expressed are strictly of the author and solely for information purpose only. It does not constitute professional advice. The author does not accept any liability for any loss or damage of any kind arising out of understanding from the above information.