Impact of discount on taxable value of supply calculation under GST Law

As per the standard practice, numerous discounts are given by the supplier to their customers such as trade discount, cash discount, performance discount etc.  These discounts are reduced from the sale price of the supply. Therefore, government of India has made provisions for it in section 15(3) of CGST Act, 2017.

Before getting into this article, we suggest you to read our earlier article on taxable value of supply under GST law. If you are already aware how taxable value of supply is calculated then, this article on impact of discount on taxable value of supply under GST law might help you to understand the provision better.

As per section 15(3), the value of supply shall not include any discount given;

  • 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
  • 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.

Based on the provisions of section 15(3) of CGST Act, 2017, not all discounts offered by the supplier to their customers are allowed as deduction from the taxable value of supply. Discounts which do not fulfil the conditions specified in section 15(3) are not deductible from the value of supply.

As per the provisions of section 15(3), discounts that are allowed as deduction from the value of supply are as follows;

  • Discounts shown in the invoice
  • Cash discount given for making the payment within a specified time period
  • Performance or quantity or volume discount

If discount is shown in the invoice then, it means discount was known at the time of supply and supplier has charged GST on the gross value less discount allowed in the invoice. If it’s not shown in the invoice, then discounts will be included in the value of supply, due to which supplier will be liable for GST on the total value including the amount of discount.

In case of cash discount and performance discount, it’s not possible for the supplier to know whether such discounts are allowed or not at the time of supply, therefore not recorded in the invoice.  In such type of situations, supplier charge GST on the gross value indicated in the invoice without considering the discount. Subsequently, when discount confirmation received, the supplier passes the discount to the buyers by issuing credit notes. These type of discounts are generally known as post supply discount.

Such post supply discounts will be allowed only when following conditions are satisfied;

  • Such post supply discounts are established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
  • Proportionate input tax credit for the discount given is reversed by the recipient.

If above two conditions are not satisfied then, goods and services tax liability of the supplier cannot be reduced. This means, discounts will be included in the value of supply and GST liability will be calculated on the total amount. However, in such cases, supplier is allowed to issue credit note to the customer for the discount amount by reducing the value of supply. This means, only difficulty for the supplier is that they cannot reverse the input tax credit taken for the discounted amount.

Circular No. 92/11/209 GST dated 07.03.2019 on treatment of sales promotion schemes under GST

Based on various representations received seeking clarification on issues raised with respect to tax treatment of sales promotion schemes under GST, Central Board of Indirect Taxes and Customs has clarified followings;

 Buy one get one free offer:

Sometimes, companies announce offers like ‘Buy One, Get One free‟ For example, “buy one soap and get one soap free” or “Get one tooth brush free along with the purchase of tooth paste”.

As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the goods or services which are supplied free of cost (without any consideration) shall not be treated as supply under GST (except in case of activities mentioned in Schedule I of the said Act).

It may appear at first glance that 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.

Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.

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.

Discounts including ‘Buy more, save more’ offers:

Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume).

For example- Get 10 % discount for purchases above Rs. 5000/-, 20% discount for purchases above Rs. 10,000/- and 30% discount for purchases above Rs. 20,000/-. Such discounts are shown on the invoice itself.

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. In commercial parlance, such discounts are colloquially referred to as “volume discounts”. Such discounts are passed on by the supplier through credit notes.

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.

It is further clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

Secondary Discounts

These are the discounts which are not known at the time of supply or are offered after the supply is already over. For example, M/s A supplies 10,000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet.

The provisions of sub-section (1) of section 34 of the said Act provides as under: “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

Representations have been received from the trade and industry that whether credit notes(s) under sub-section (1) of section 34 of the said Act can be issued in such cases even if the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.

It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.

In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.

There is no impact on availability or otherwise of ITC in the hands of supplier in this case. Link to get the circular

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.