6 months, 1 week ago mycaguruKeymaster
Tax Treatment Trade/Cash Discounts GST Regime
Tax Treatment Trade/Cash Discounts 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.”
Also read- Input Service Distributor in GST Regime
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.
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.
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.