Creating Knowledge Bank-CKB : Taxability of GST on Discount

Tax treatment of discount is the most critical area of the discount saga. Discount is generally given by the supplier to boost his sales. Different types of discount prevails in the business like general discount, turnover discount, cash discount etc.

Most preferred and litigation free way of showing discounts is to show the same on the invoice but due to commercial reasons, it may not be possible to show all discounts on the invoice itself and the problem actually starts there.

Tax Authorities does not want to reduce discount from taxable value except when such discount shown in invoice itself while tax payer claim that he has never received the consideration thus it must be reduced. Honourable courts held in many cases that showing discount invoice is not solution to pass discount to customer and arrive the taxable value.

Recently GST wing of CBIC has issued a circular clarifying various issue on discount and its taxability under GST however before going into discussion of circular it would be better to look provisions of CGST Act,2017

Section 15 of the Act deals with valuation of supply in which reference of discount is found under sub section (3) of the said section, which states as under:-

Section 15 (3)

(1).

(2)

(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.

Thus Section leads us to the following logical inference:

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

b. 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) Input Tax credit attributable to the discount is required to be reversed by the buyer or recipient of the supply.

The impact of the mode of disbursement of discount could be summarized as under from a GST perspective:

è If the discount is disbursed at the time of supply then the same should be shown on the invoice and GST would be computed on the value net of discount.

è If discount is disbursed at a later date, then credit note should be issued and the same credit note should be linked to the supply invoice and the recipient of should reverse the Input Tax Credit attributable to such discount.

GSTR-1 require to upload credit note invoice wise thus ITC of Recipient would get reduced automatically when GSTR 2A get reflected to him.

However issues related to discounts & promotion schemes, specifically in FMCG, pharma and other consumer product companies was in dilemma. These type of companies float various discount schemes to boost their sale. But GST allows ITC only when output is supplied. There were various issues in this relation.

· Whether the items offered for free will fall under free gift and ITC will be required to be reversed.

· Whether the quantity discounts passed on after sale will be excluded from taxable value.

· Whether any reversal of ITC will be required by the buyer.

· Whether a financial credit note can be issued when the discount doesn’t fulfill the condition u/s 15(3).

Such issues resolved by CBIC via circular no. 92/11/2019 related to Discount & promotion schemes in GST.

Recently CBIC has issued circular 105/24/2019 dated 28th June 2019 and has clarified the various doubts related to treatment of post sale discounts under GST.

Scenario 1:	if post sale discount is given without any further obligation or actions on dealer end, Or Discount decided at the time of sale but determined in future then in that case supplier will issue credit note to the dealer.	In that case the post-sale 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.
Scenario 2:	if post sale discount is required some obligation or action on dealer end, e.g. undertaking special sales drive, advertisement campaign, exhibition etc in this case the transaction are treated as separate transaction and the dealer will issue a separate invoice to original supplier on such transaction.	In that case the post-sale discount given by the said supplier to dealer shall be treated separate supply from “dealer to supplier of goods” GST would be payable by dealer and supplier will get ITC of such GST paid.
Scenario 3:	If additional discount is given by the supplier of goods to the dealer to offer a special reduce price by the dealer to the customer to augment the sale volume	Such additional discount would represent the consideration flowing from the supplier to the dealer for the supply made by the dealer to the customer and GST would be applicable on such consideration by the Dealer and Supplier will get ITC
4.	It has already been clarified vide Circular No.92/11/2019-GST dated 7th March, 2019 that the supplier of goods can issue financial /commercial credit notes in such cases but he will not be eligible to reduce his 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.