Under GST, valuation of taxable supply is a critical aspect. While value of supply under GST has various points need to be considered and one such area is GST discounts and its treatment.
A lot of confusion among businesses and CA’s regarding treatment of various GST on discounts received by a business.
With regard to this, a clarification was issued by CBIC through Circular number 105/24/2019 where post sale discount treatment has been discussed.
Let us now understand the treatment of discounts under GST in detail.
Exclusive video on Who Can Claim GST Refund
Legal Provisions for GST on Discounts
Discounts are generally given by supplier to boost sales or encourage the buyer to pay promptly. Treatment of discounts is defined in Section 15(3) of CGST Act, 2017. The section states that –
The value of supply shall not include any discount which is 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.
From above, we can classify GST on discount based on time of discounts –
(1) Discounts given before or at the time of sale
(2) Post sale Discounts.
As we are talking about GST on discount, The treatment of GST depends on the type of discount which we will now see in detail.
1. Discounts given before or at the time of sale to understand GST on discount
Discounts that are given before or at the time of sale can be deducted from transaction value at the time of sale; no GST will be levied on the same. However, such discounts shall be mentioned on the GST tax invoice (GST sales invoice).
Lets understand the GST on discount with example:
Example 1 – Mr X sells goods to Mr Y worth Rs 50,000 and gives Rs 1000 discount for cash payment. GST applicable is 18%. Transaction value and GST will be calculated as follows –
Value of Goods
(Less) - Discount
Transaction Value of Goods
(+) CGST @ %9
(+) SGST @ %9
2. Post sale discounts & details of GST on discount
Post sale discounts are those which are given by the supplier after the sale has been effected.
Post sale discounts can be classified into 3 categories –
- Discount agreed at the time of supply
- Discount not agreed at the time of supply
- Discount with an additional burden to do some act
(a) Discount agreed at the time of supply –(GST on discount)
A supplier has to issue a GST credit note where the recipient or buyer has fulfilled the terms of agreement.
The recipient has to reduce the amount of GST as mentioned in credit note from the input tax credit already availed against that supply. Thus, we can understand that one has fulfil the following conditions –
- Discount terms are agreed at the time of supply
- Input tax credit on the discount has been reversed by the recipient of supply
- Such discount can be linked to that particular supply or invoice
- Credit note is issued within six months from the end of the financial year
(Less) - IGST @
Credit Note Value
Mr. Y will have to reverse Rs 18 from input tax credit availed earlier.
(b) Discount not agreed at the time of supply – (GST on discount)
Sometimes, discounts are provided even if the same are not agreed with the supplier at the time of supply. Such discounts (discount in GST)are generally given for bulk quantity, early payment, price reduction, etc.
In such cases, where discount was not agreed at the time of sale, credit note with GTS cannot be issued as it does not satisfy the conditions of section 15(3).
However, as per clarification provided by CBIC vide Circular No. 92/11/2019-GST dated 7th March, 2019, a supplier can issue a financial credit note for such discounts. Such credit notes will not have GST.
Further, CBIC has also clarified vide Circular No. 105/24/2019-GST dated 28th June, 2019 that the recipient shall not reverse the input tax credit already availed if he pays the supplier the entire value of tax charged on the original invoice along with the taxable value of supplies less value of financial credit note
Mr X sells goods worth Rs 50,000 to Mr Y including GST amounting to Rs 4000. No discount was agreed at the time of sale (or time of supply). However, due some reason prices of the goods was reduced to by Rs 1000. Mr X issues a financial credit to Mr Y for Rs 1000.
In this case, Mr Y shall avail full input tax credit of Rs 4000 provided –
# Discount was not agreed at the time
# He makes full payment of tax to supplier along with value of goods
Rs 49000 i.e. Amount of Tax Rs 4000 plus value of supply Rs 45000 (50,000 – 4000 (Tax) – 1000 (Discount))
(c) Post sale discount provided on fulfilment of certain obligation – (GST on discount)
Where a discount is provided to a dealer / recipient only on complying with certain obligations like advertisement, exhibitions, sales drive, etc., such discounts provided shall be treated as separate transaction.
As per clarification provided by CBIC vide Circular No. 105/24/2019-GST dated 28th June, 2019, such transaction shall be treated as separate transaction between supplier and recipient and the recipient shall issue a tax invoice for such transaction that shall be compensated by the supplier. Supplier can also avail input tax credit on the same.
Treatment of discount in the books of supplier and the recipient will depend on the conditions under which such discount has been provided. One of the important points to be considered is whether the discount was agreed at the time of sale or not.
Eliminate 300 hours of filing GST returns.
Automate your GST Return Filing (GSTR 1, GSTR 3B, GSTR 9, GSTR 9C and Automated Reconciliation), we'll arrange a 'live demo' with our technical team.