Discounts under GST: Impact on Value of Supply

Welcome back to disytax! Discounts are a common practice in the world of business, used to attract customers, clear stock, or incentivize bulk purchases. However, under the Goods and Services Tax (GST) regime, the treatment of these discounts significantly impacts the value of supply, which in turn determines the amount of GST payable. This article delves into the intricacies of how different types of discounts are treated under GST, providing clarity with examples to ensure accurate tax compliance for your business.

The Guiding Principle: Transaction Value

As we’ve discussed in previous articles, the primary basis for determining the value of supply under GST is the transaction value. This is the price actually paid or payable for the goods or services, provided that the supplier and the recipient are not related and the price is the sole consideration for the supply (as per Section 15(1) of the CGST Act, 2017).

Section 15(3): The Specific Provision for Discounts

Recognizing the prevalence of discounts, the GST law specifically addresses their treatment in Section 15(3) of the CGST Act, 2017. This section allows for the exclusion of certain discounts from the transaction value, thereby reducing the taxable value. However, not all discounts qualify for this exclusion.

Understanding the Two Main Categories of Discounts:

For GST purposes, discounts can be broadly categorized into two types based on when they are offered:

• Discounts given before or at the time of supply and shown on the invoice.
• Discounts given after the supply has been effected.

Let’s examine each category in detail:

1. Discounts Given Before or At the Time of Supply and Shown on the Invoice:

These are the most straightforward types of discounts. If a discount is offered to the customer either before or at the exact moment the supply is made, and this discount is clearly indicated on the invoice issued for that supply, then the value of supply will be the price after deducting the discount.

Key Requirements:

• The discount must be offered on or before the time of supply.
• The discount must be explicitly mentioned on the invoice issued for the supply.

Examples:

• Trade Discount: A manufacturer offers a 10% trade discount on the list price of goods to its distributors. If the list price is ₹10,000 and the discount is shown on the invoice, the value of supply will be ₹9,000 (₹10,000 – ₹1,000). GST will be calculated on ₹9,000.
• Cash Discount for Immediate Payment: A retailer offers a 2% cash discount if the customer pays immediately at the time of purchase. If the price is ₹5,000 and the customer avails the discount, the invoice will show the discounted price of ₹4,900 as the value of supply.
• Quantity Discount (Slab-Based): A supplier offers the following discount structure:
  • Purchase 1-5 units: No discount
  • Purchase 6-10 units: 5% discount
  • Purchase above 10 units: 10% discount

  If a customer purchases 12 units and the 10% discount is applied and shown on the invoice, the GST will be levied on the discounted value.

2. Discounts Given After the Supply Has Been Effected:

Discounts offered after the supply has already been made are treated differently under GST. These discounts can be excluded from the value of supply only if all the conditions mentioned in Section 15(3)(b) of the CGST Act are met:

• (i) The discount is established in terms of an agreement entered into at or before the time of supply and specifically linked to relevant invoices. This means there must have been a pre-existing agreement (written or otherwise) between the supplier and the recipient, agreed upon before or at the time of the actual supply, which clearly outlines the terms and conditions of the post-supply discount. Furthermore, this agreement must clearly link the discount to specific invoices.
• (ii) Input tax credit as is attributable to the discount on the original supply has been reversed by the recipient of the supply. This is a crucial condition. If the recipient has already availed input tax credit (ITC) on the original value (before the discount), they are required to reverse the ITC attributable to the amount of the discount. This ensures that the government does not lose out on revenue due to a reduction in the taxable value after the ITC has already been claimed.

Examples:

• Volume-Based Discount (Retrospective): A manufacturer agrees with a distributor at the beginning of a financial year that if the distributor achieves a certain sales volume by the end of the year, they will receive an additional 5% discount on all purchases made during the year. If the distributor meets the target and receives the discount, the manufacturer can issue a credit note (as per Section 34 of the CGST Act) for the discount amount, reducing the value of supply for the relevant invoices, provided the distributor reverses the corresponding ITC.
• Target-Based Incentive: A supplier promises a retailer a 3% incentive if they achieve a specific sales target for a particular product within a quarter. If the target is met, and the supplier issues a credit note for the incentive, the reduction in value of supply is allowed only if the retailer reverses the ITC claimed on the original purchase value related to this incentive.

Scenarios Where Post-Supply Discounts May NOT Be Excluded:

• No Prior Agreement: If the discount is offered unilaterally by the supplier after the supply without any prior agreement, it cannot be excluded from the value of supply.
• No Link to Specific Invoices: If the post-supply discount is not specifically linked to the invoices of the original supply, it will not qualify for exclusion.
• ITC Not Reversed: If the recipient fails to reverse the input tax credit attributable to the discount, the supplier cannot reduce the value of supply.

Specific Scenarios and Examples in Detail:

Cash Discounts: As mentioned earlier, cash discounts offered for immediate payment and shown on the invoice are treated as pre-supply discounts. However, if a cash discount is offered after the invoice has been issued for early payment within a specified period, it would fall under the category of post-supply discounts and the conditions of Section 15(3)(b) would need to be met for it to be excluded from the value of supply.

Trade Discounts: Trade discounts are generally allowed as a deduction from the list price to arrive at the transaction value, provided they are given at or before the time of supply and are shown on the invoice.

Quantity Discounts:

• Upfront Quantity Discounts: If the discount is known at the time of supply based on the quantity purchased and is reflected on the invoice, it is treated as a pre-supply discount.
• Retrospective Quantity Discounts: If a discount is offered based on the total quantity purchased over a period (e.g., a year-end volume rebate), it falls under the category of post-supply discounts and requires a prior agreement and ITC reversal.

Seasonal Discounts: Discounts offered during specific seasons or promotional periods are usually known at the time of supply and are shown on the invoice, thus treated as pre-supply discounts.

Conditional Discounts: If a discount is contingent upon the customer fulfilling a certain condition (e.g., making payment within a specific timeframe), and this condition is met at or before the time of supply and reflected on the invoice, it’s a pre-supply discount. If the condition is met after the supply, it becomes a post-supply discount subject to the conditions of Section 15(3)(b).

Documentation and Invoicing: The Key to Compliance

Maintaining proper documentation is crucial when dealing with discounts under GST.

• Invoices: All discounts given before or at the time of supply must be clearly mentioned on the invoice, showing the original price, the discount amount, and the final taxable value.
• Agreements: For post-supply discounts, a clear written agreement established before or at the time of supply outlining the discount terms, calculation method, and linkage to specific invoices is essential.
• Credit Notes: When post-supply discounts are allowed, the supplier needs to issue a credit note to the recipient, reducing the taxable value of the original supply. The credit note should clearly refer to the original invoice(s).

Impact on Input Tax Credit (ITC): A Two-Way Street

• Supplier: The supplier will pay GST on the value of supply after deducting the permissible discounts.
• Recipient:
  • For pre-supply discounts, the recipient will claim ITC only on the discounted value.
  • For post-supply discounts that are allowed as a reduction in value, the recipient is obligated to reverse the ITC attributable to the discount amount. This reversal should be done as per the rules prescribed under the GST Act.

Summary Table: Treatment of Discounts under GST

Conclusion: Navigating Discounts for GST Compliance

The treatment of discounts under GST is a critical aspect of determining the correct value of supply and ensuring accurate tax compliance. While discounts offered upfront and clearly mentioned on the invoice are generally straightforward, post-supply discounts require careful adherence to the conditions laid down in Section 15(3)(b) of the CGST Act, particularly the requirement for a pre-existing agreement and the reversal of input tax credit by the recipient.

By understanding these rules and maintaining proper documentation, businesses can effectively manage their discount strategies while remaining compliant with the GST regulations. Stay informed with disytax for more insights into the world of GST and taxation!

Disclaimer: This article provides general information about the treatment of discounts under GST and should not be considered as professional tax advice. Businesses are advised to consult with tax professionals for specific guidance based on their unique circumstances and the latest provisions of the GST law.