Discount is one kind of incentive being offered by the seller to the buyer through reduction in the usual price of goods to enhance volume of business and generate profit. Tax liability has to be discharged by the seller by deducting the amount of discount from the total price of goods. There are various kinds of discounts provided by the seller to the buyer as incentive to meet his business target. There are certain discounts are pre-sale discounts and some discounts are post-sale discounts. The pre-sale discount are predetermined and disclose to the customer beforehand of sales but post sale-discounts are related to quantity discounts, year-end discounts, cash discounts and prompt payment discounts.
In case of pre-sale discount, which shown in invoices to derived assessable value for payment of tax. In case of post-sale discount on satisfying condition of sale contract, the seller awarded discounts to the buyer through credit notes. Whether volume sale discount have effect on value of supply and tax liability? This question is answered by AAR -Karnataka.
The GST liability on volume sale discount as post-sale discount was examined by Authority of Advance Ruling Authority, Karnataka:
The GST liability on volume sale discount as post-sale event was examined by Authority for Advance Ruling, Karnataka ( AAR) vide Order dated 24-09-2019 in Kwality Mobikes (P) Ltd. – 2019(30) G.S.T.L. 668 ( A.A.R.- GST).
In this case, the applicant is a private limited company and is registered under the GST Act, 2017. The applicant has sought advance ruling as respect of the following questions:
(a) Whether the volume discount received on purchases is liable for GST? If yes, under which HSN/SAC?
(b) Whether volume discount received on retail (on sales) is liable for GST? If yes, under which HSN/SAC?
(c) Whether the company has to issue taxable invoice to this effect?
Submission of the Applicant:
The applicant states that he is in the business of supplying motor vehicles. He is the authorised dealer for Harley-Davidson India, who manufacturers high end two wheeler motorcycles. The applicant in its regular course of business purchases the vehicles from the authorised supplier wherein it charges 28% GST plus applicable Cess.
The authorised supplier allows credit period of 30 days and also fixes sales targets to the applicant. Besides, on purchase of vehicles which are over and above the limit fixed on regular purchases, the applicant is also eligible for volume discount, which is paid on monetary terms.
Hence, the applicant is eligible for Volume Discount on retail i.e. Sales Commission and on purchases over and above the target is eligible for Regular Volume Discount (i.e. on purchases). The authorised supplier issues Credit Note and this credit note is not affecting the purchase price or sale price and hence has no effect on GST collected in the invoices.
Findings of AAR:
The transaction of the applicant is examined and found that the authorised supplier is issuing a tax invoice on the supply of goods to the applicant and the applicant is taking credit of the input tax charged in the invoice. The applicant when makes more purchases is eligible for the volume discount on purchases and a credit note is issued by the authorised supplier and no adjustment of price is made in respect of the goods already sold nor any adjustment of GST is made in the credit note. The applicant is also not claiming any reduction in input tax credit already claimed by him as it does not affect the price of the goods sold. Hence, the amount received by the applicant is in the form of an incentive provided by the authorised supplier and does not affect the sale price of the goods already sold and hence there is no liability to charge GST on the same.
The applicant when sells more than his target is eligible for the incentive which is provided by the authorised supplier in the form of a credit note without affecting the sale price of the goods purchased or sold. Even this is in the form of incentive and no adjustment of price nor is tax done either by the applicant or the authorised supplier. Hence, the amount received by the applicant is in the form of an incentive provided by the authorised supplier and does not affect the sale price of the goods already sold and hence there is no liability to charge GST on the same.
Further, the applicant is not providing any service to the authorised supplier and is only receiving the incentive. Indirectly, it has an effect on the sale price of the goods purchased by the applicant from the authorised supplier and is actually in the form of discount. But Section 15(3) of the CGST Act, 2017 states as under:
“(3) 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.”
Since the credit note is issued as a post-sale event, the same is not covered under the clause (a) of the above provision. Further, the applicant has not reversed the input tax credit attributable to the discount received in the form of credit note from the authorised supplier, the same cannot be covered under clause (b) above. Hence in view of the above, the credit note issued by the supplier in the pertinent case does not have any effect on the value of supply and hence is only a financial document for account adjustment for the incentive provided. Hence there is no effect on the GST.
(1) The Volume Discount received on purchase in the form of credit note without any adjustment of GST is not liable for GST.
(2) The Volume Discount received on Retail (on sales) in the form of credit note without any adjustment of GST is not liable for GST.
Thus in the given case, credit note issued by the dealer does not have any effect on the value of supply and is only a financial document for accounts adjustment for the incentive provided. Hence, there is no effect of GST. Therefore, volume discount received on purchase and sales in the form of credit notes without any adjustment of GST is not liable for GST.
Conclusion: GST liability on account of discounts offered by seller on sale / supply of Goods should be examined with referring to the nature of discounts provided by seller and sale contract executed between them. The provisions of issuing credit notes after sales and allowing discounts to the buyer, in this connection, C.B.I. & C, Circular dated No. 92/11/2019-GST, dated 7’th March’2019 to be followed, which has clarified the taxability of goods supply allowing various discounts, valuation, eligibility of input tax credit shall be availed by the purchaser on account of discounts offered by the supplier.
(The Author is a practicing advocate at Orissa High Court and can be reached at email@example.com.)