Treatment of Discounts under GST – A Study

Treatment of Discounts under GST – A Study

Discounts are an integral part of business. Offering trade, cash post-sale discounts are very common in business. Business generally offer trade discounts to increase sales, while cash discounts are given to recover payments quickly and Post-Sale discounts are given if certain targets are achieved or promotional schemes are run by distributors.

DISCOUNTS UNDER PRE_GST ERA :

• 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:

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

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 have entered in an agreement where the discount is mentioned.

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 i.e. GST would not be charged on discount.

There will be no differentiation in GST between trade and cash discounts.

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 20 % discount on the sale of goods worth Rs. 1000 to its ditributor. If the company mentions the discount amount (Rs. 200) separately in the invoice, the value of the taxable supply will be Rs.800 (1000–200).

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

Department’s : Circular No. 92/11/2019-GST dated 07th March, 2019 and Circular No. 105/24/2019-GST clarified below:

Buy one get one free offer:

In case of offers like “Buy One, Get One Free‟, one item is being supplied free of cost without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one.

It is also clarified that 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.

Treatment:  As a matter of abundant caution few co’s don’t take ITC on purchase of items which are supplied as free, as onus is on them to prove that the additional item provided has a value bundled in the final single price. Although co’s may take a call to claim the same and classify the goods under 1+1 scheme as Mixed Supply.

Discounts including ‘Buy more, save more’ offers

Some suppliers also offer periodic / year ending discounts to their stockists, etc. For example- Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of 2% if you purchase 15000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end

It is clarified that discounts offered by the 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) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub-section (3) of section 15 of the said Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.

Secondary Discounts :

It is clarified that if the 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, then the post sales discount given by the said supplier will be related to the original supply of goods and it would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act.

However, if the additional discount given by the supplier of goods to the dealer is the post-sale incentive requiring the dealer to do some act like undertaking special sales drive, advertisement campaign, exhibition etc, then such transaction would be a separate transaction and the additional discount will be the consideration for undertaking such activity and therefore would be in relation to supply of service by dealer to the supplier of goods. The dealer, being supplier of services, would be required to charge applicable GST on the value of such additional discount and the supplier of goods, being recipient of services, will be eligible to claim input tax credit (hereinafter referred to as the “ITC”) of the GST so charged by the dealer.

If the 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 then 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. This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer.

Treatment: Co’s treat claims from Distributors (Secondary Discounts) as a supply of service/goods and claim ITC on Invoices raised by the distributors/dealers.

They can also consider switching to a new model to save on the cash flow and GSTR 2 vs 2A reconciliation as below :

Price /Supply Discounts – Co’s may issue financial credit notes for passing on the discounts but they will not be eligible to reduce original tax liability.

Doubts have been raised as to whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial / commercial credit notes have been received by him. It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

SAVING for moving to Financial Credit Note model:

1. Cash Flow saving of GST amount per transaction

2. Mismatch for GSTR 2 vs2A would reduce drastically.

3. Follow up with parties would reduce.

Pre-requisite : Agreements should be clearly laid out with dealers/distributors regarding type of discount offered. Other than this it would be difficult to prove the actual nature of transaction resulting in increased Output Tax Liability.