Tax Treatment of Trade/Cash Discounts under GST Regime

Offering trade and cash discounts is a built-in promotional scheme of almost every entity and Discounts and price reductions during negotiations after supply of goods and services is very common in business. Business generally offer trade discounts to increase sales, while cash discounts are given to recover payments speedily.

Discounts under pre-GST regime

• Excise – Discounts given on/before time of sale are allowed
• VAT – Different treatment in different States
• Service tax – Allowed

Discounts under GST regime

Sec.15 of the CGST Act, 2017, reproduced below, deals with the provision of discount, as under:

“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.”

The logical inference which could be drawn from plain reading of above provision is:

1. Discount, if mentioned on the face of the invoice, can be reduced from the taxable value of the supply of goods.

2. Discount, even if not mentioned on the face of the invoice can be reduced from the taxable value, if following conditions are satisfied:

i) Discount is established in terms of an agreement before supply. In simple words, both supplier and recipient are aware and have agreed about the discount before the supply.

ii) Discount is linked to a specific supply invoice.

iii) ITC attributable to the discount is required to be reversed by the buyer or recipient of the supply.

GST liability of the supplier would be reduced if both supplier and receiver of the goods or services are aware of the discount before supply.

There will be no differentiation in GST between trade and cash discounts. In fact, GST segregates the discounts allowed into two categories:

• Those given before or at the time of supply, and
• Those given after the time of supply.

Discount allowed before or at the time of supply, and it has been mentioned in the invoice separately, it will not be added in the value of supply.

Example: Company offers a 10 % discount on the sale of goods worth Rs. 200. If the company mentions the discount amount (Rs. 20) separately in the invoice, the value of the taxable supply will be Rs.180 (200–20).

Discount allowed after the supply, it may or may not be added in the value of the supply, depending upon following:

• The discount has been allowed as per the terms already agreed upon before or at the time of supply, or
• The discount can be linked directly to the invoice of supply,
• The input tax credit (ITC) related to the amount of the discount allowed has been reversed by the recipient of the supply.

Hence, the intent or commercial arrangement between the supplier and buyer would decide whether the discount in relation to any supply could reduce the GST liability of the supplier to the extent of such discount. If post supply discounts were not anticipated at the time of supply, it is not allowed to be deducted from value.

Ad hoc discount given after supply is not eligible for deduction from ‘value‘ In case ,there is no pre fixed criteria, basis or rationale for arriving at the quantum of discounts. It will not consider and allowed as discount . In UltraTech Cement Ltd., In re [2018] (AAR – Maharashtra) ,the post supply amounts were paid to the dealer towards “rate difference” and “special discount” It was held that these discounts are not complying with the requirements of section 15(3)(b)(i) of the CGST Act and therefore cannot be considered and allowed as discount for the purpose of arriving at the ‘transaction value’ in terms of Section 15 of the CGST Act.

Discount is not subject to GST if giving trade discount after sale is a regular trade practice  :It was held in Maya Appliances P. Ltd. v. ACCT (2018) that all the regular trade discounts are allowable as permissible deductions. It is a matter of common experience that in the present contemporary competitive market, trade discounts not only are dependent on variable factors but also might be strategically can not disclosed at the time of original sale/purchase

Cash Discount

Example – A company has a policy of allowing a cash discount of 10% if a customer makes payment of a particular invoice within 30 days. In such a situation the discount will not be added to the value of taxable supply. The customer has to reverse the ITC on the amount of the discount allowed.

Cash Discount not agreed before or at the time of supply

Example – A company doesn’t have a policy of cash discounts at the time of payment, however, has supplied goods to a customer who didn’t pay his debts. If this company now offers the customer a 10% discount in order to encourage the customer to clear all his debts, but the discount wasn’t agreed before or at the time of supply, and can’t be linked to a particular invoice, this discount will be added in the value of the taxable supply.

Quantity discounts – known before supply are excluded to determine value of supply : In some cases, discounts are known before supply of goods or services but may be given after supply and staggered quantity discounts are offered based on quantity purchased by the recipient.

It has been clarified vide Para C of CBI&C circular No. 92/11/2019-GST dated 7-3-2019 that discounts offered by suppliers to customers (including staggered discount under ‘Buy more, save more scheme’ and post supply volume discounts established before or at the time of supply) are excluded to determine value of supply if such discount fulfils requirements of section 15(3) of CGST Act.

Recipient is required to reverse ITC. However, supplier is entitled to full ITC of inputs, input services and capital goods in relation to supply of goods or services or both on such discounts (i.e. it is not necessary to reverse ITC proportionate to such discounts). 

Treatment of ‘Buy one get one free’ or ‘one item free’ offers  : These offers are  not considered as ‘free supply’ It can be treated as supply of two goods for the price of one. In such cases, rate of tax will depend on whether it is composite supply or mixed supply. Further, ITC will be available in relation to supply of goods or services or both as part of such offer Para B of CBI&C circular No. 92/11/2019-GST dated 7-3-2019.

Discount offered after supply: Discount offered after supply is termed as second discount .Often, discounts are offered after supply of goods or services are made. Such discounts are not known before supply. In such cases, financial/commercial credit note(s) can be issued without GST. The recipient of goods or services can avail entire ITC of GST charged by supplier in his original invoice – Para D of CBI&C circular No. 92/11/2019-GST dated 7-3-2019. reiterated in Para 5 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

Financial/commercial credit note means credit note other than that specified in CGST Rules, i.e. without any GST implication.

Post Sale discounts without any obligation by the Dealer   – In some cases, post sales discounts are given by manufacturer or wholesaler (supplier) to dealer without any further obligation or action required at the dealer’s end. Such post sale discount will relate to original supply of goods. It would not be included in value of supply if discount was known prior to supply. In such case, credit note with GST can be issued as per provisions of rule 53 of CGST Rules.

If such discount was not known prior to supply, financial/commercial credit note can be issued without GST. In that case, reduction is GST liability is not possible, but the recipient of goods or services is not required to reverse the Input Tax Credit of tax charged to him in the invoice of supplier – Para 3 and 5 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

Post Sale discount where dealer is required to do further act  In case ,post sale discount is given by manufacturer/wholesaler to dealer requiring dealer to undertake further obligation like special sales drive, advertisement campaign, exhibition etc, the dealer will be liable to issue tax invoice to supplier (manufacturer/wholesaler) and charge GST. The supplier of goods (manufacturer/wholesaler) can take Input Tax Credit of such tax of GST charged to him by the dealer – Para 3 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

Additional post sale discount  by supplier to dealer to increase  Sales  : At time , in order to compete in market , the manufacturer  give additional discount to the dealer for selling goods to the customer at a low price . This additional discount is additional consideration by supplier of goods (manufacturer/wholesaler) to the dealer. The dealer would be liable to pay GST on that amount – Para 4 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019.

How supplier will ensure reversal of ITC by the buyer

The provision in the new GST Law about treatment of discounts though is clear and uniform across the country, the execution of the provision makes the issue complicated. Mainly because here the supplier’s benefit is completely dependent on an action or inaction, with regard to reversal of ITC, by the buyer. A supplier cannot have any control over the buyer’s action on the treatment of discount in his books. Solution for dealing with this situation could be that all transactions are recorded through GSTN portal. And, a mechanism which could possibly be explored is, the credit note on account of discount uploaded by the supplier would automatically reduce the ITC of the buyer.

(Republished with Amendments. Amendments been made by CA Anita Bhadra)