pri Post Supply discount other than those covered by section 15(3) to be treated as non-payment Post Supply discount other than those covered by section 15(3) to be treated as non-payment

There had been various contentions relating to post-supply discounts/incentives/rebates being given by the supplier to its customer. There are whole lot of transactions such as quantity based discounts, cash discounts, price adjustment etc. which have raised the complexity regarding levy of GST revolving around discount provisions. The wrong practices and the nature of transactions have pushed government to come out with Circular 92/11/2019-GST dated 07.03.2019 clarifying levy of tax on various such transactions. One of the peculiar transactions is the cash discount/incentives after the supply has been made and admissibility of Input Tax Credit in this regards.

The circular clarified that GST is liable to be reversed only on those discounts which have been given/passed on as per section 15(3) of the CGST Act 2017. It prescribes that discount is permissible either by mentioning on the invoice or by an agreement between the supplier and customer. Any discount which does not fulfil either of the conditions would not be eligible for reversal of output tax liability at the hands of the supplier. Such discount or adjustment which is not covered u/s 15(3) shall also remain ineligible for purposes of issue of credit note u/s 34 of the CGST Act 2017. In this regards the value of supply would remain same as per invoice and the parties decide to go ahead with any sort of adjustment, they can do so by way of commercial debit/credit notes. This means that for the purposes of GST such discounts/adjustment will have no impact on the value of supply resulting into output tax liability at the hands of the supplier. But the circular did not clarify as to what would be the impact of such commercial documents as far as the admissibility of Input Tax Credit at the hands of the recipient is concerned.

The admissibility of ITC at the hands of recipient due to non-payment on account of commercial debit/credit notes becomes important due to these three issues:

1. Will the amount not paid by recipient be treated as adjustment or non-payment in terms of section 16(2) of the Act?

2. If the payment is made at the later stage, will the recipient be allowed to claim input tax credit?

3. What would be the accounting treatment in case of such discounts?

First two issues had been made clear by an advance ruling in the case of M/s MRF Limited 2019(3) TMI 928- AAR TN  where it has been held that the such price adjustment/discounts will be treated as non-payment at the hands of the recipient. This invites for increase in output tax liability in terms of section 16(2). The ruling held that commercial documents will have no impact on the value of supply being made by the supplier. In order to be eligible for reversal of liability by the outward supplier, conditions of section 15(3) shall be fulfilled. Where the conditions of law are not fulfilled, mere commercial adjustment would have any impact as far as taxability is concerned.

For instance M/s Yasho Ltd. makes the supply amounting to Rs. 10 lakhs to M/s Mati Limited. Upon early payment and in interest of business relationship, supplier provides a discount of 5% to the recipient. In such case, since there was neither mention of discount on invoice nor there was any agreement between both the parties, such discount does not fulfil condition of section 15(3). Hence in this scenario the supplier would pay tax at Rs 10 lakhs (value of supply) but the recipient has to increase his output tax liability on amount of Rs. 50,000/- received towards the discount. In future if the recipient discharges the said amount he can claim back the amount in form of ITC.

The third issue relating to accounting treatment is something where most of the entities are facing the real issue. In our case let us understand the accounting treatment:

Books of Supplier (Yasho Limited)

Mati Ltd A/c 11,80,000
To Sales 10,00,000
To GST Payable 1,80,000
(Being Sale Made)
GST Payable 1,80,000
To Bank A/c 1,80,000
(Being GST Paid)
Discount A/c 50,000
To Mati Limited 50,000
(Being Discount Given)

Books of Recipient (Mati Limited)

Purchase A/c 10,00,000
Input Tax Credit A/c 1,80,000
To Yasho Limited 11,80,000
(Being Purchases Made)
Output GST Payable 1,80,000
To Input Tax Credit 1,80,000
(Being ITC Availed)
Yasho Limited 11,30,000
To Bank A/c 11,30,000
(Being Amount Paid)
Yasho Limited 50,000
To Discount Received 50,000
(Being Discount Received)
ITC Receivable 9,000
To Output Tax Liability 9,000
(Being Output Liability Created)
Output Tax Liability 9,000
To Bank A/c 9,000
(Being Output Tax Paid)
Discount Received 50,0000
To Yasho Limited 50,000
(Being Entry Reversed)
Yasho Limited 50,000
To Bank 50,000
(Being Consideration discharged)
Input Tax Credit A/c 9,000
To ITC Receivable 9,000
(Being ITC now eligible)


Either the parties have to go en-route section 15(3) read with Section 16(2) and make necessary adjustment or simply if the parties really wish to avoid the complications, the recipient can issue the invoice for services amounting to Rs. 50,000 along with GST and the supplier may pay it in cash or kind to the recipient, leaving both the parties at status quo.


The views of the author are based upon his understanding of the law. He holds no responsibility for any gain/loss which may occur to anyone based upon his interpretation of law.

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  1. Omprakash Agarwalla says:

    In my humble opinion, Ld AAR has misinterpreted the 2nd proviso to section 16(2) and has failed to appreciate the word “fails” used in the second proviso. In addition to that the term “Payment” also includes adjustments by discounts.

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July 2021