Understanding the Treatment of Discounts Under the CGST Act, 2017

Introduction to Discounts Under the CGST Act, 2017

The Central Goods and Services Tax (CGST) Act, 2017, brought about significant changes in the way businesses operate in India, especially in terms of taxation. One of the key aspects of this act is the treatment of discounts in the valuation of supply. Understanding how discounts impact the valuation can help businesses ensure compliance and optimize their tax liabilities.

Types of Discounts and Their Treatment

Under the CGST Act, 2017, discounts can broadly be classified into two types: pre-supply discounts and post-supply discounts. Each type has specific conditions under which they are treated in the valuation of supply:

Pre-supply Discounts: These are discounts agreed upon before or at the time of supply. They are generally mentioned on the invoice and are directly deducted from the value of the supply. As per Section 15(3)(a) of the CGST Act, these discounts are excluded from the transaction value provided they are known at the time of supply.

Post-supply Discounts: These are discounts provided after the supply has been made. For these discounts to be excluded from the transaction value, they must be established in terms of an agreement entered into at or before the time of supply and can be linked to the relevant invoices. Additionally, the recipient of the supply must reverse the Input Tax Credit (ITC) attributable to the discount.

Conditions for Excluding Discounts from Valuation

The CGST Act stipulates certain conditions that must be fulfilled for discounts to be excluded from the value of supply:

1. The discount must be agreed upon before or at the time of supply and should be clearly mentioned on the invoice.

2. For post-supply discounts, there should be a pre-existing agreement, and the recipient must reverse the ITC attributable to the discount.

3. The discount should be determinable and linked to specific invoices.

By meeting these conditions, businesses can ensure that the discounts are appropriately accounted for, thereby reducing the taxable value of the supply.

Implications for Businesses

Treatment of discount as per CGST ACT.

While calculating GST on valuation of supply, discount shall not be the part of valuation but up to certain conditions, which are as follows:

1.) When discount is known before or at the time of supply and such discount also recorded in invoice then such discount will not be part of value (i.e. no need to pay GST on it). Such discount shall be mentioned on the GST invoices.

2.) After the supply if

a) 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

b) 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.

In our case discount will be treated as post sale discount and there will be various scenario and its treatment which will be discuss below:

Scernario-1

When post-sale discount is given by the supplier of goods to the dealer without any further obligation or action required at the dealer’s end

The post sales 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, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act

Scernario-2

When additional discount given by the supplier of goods to the dealer is the post-sale incentive requiring the dealer to do some act like undertaking special sales drive, advertisement campaign, exhibition etc.

Then such transaction would be a separate transaction and the additional discount will be the consideration for undertaking such activity and therefore would be in relation to supply of service by dealer to the supplier of goods. The dealer, being supplier of services, would be required to charge applicable GST on the value of such additional discount and the supplier of goods, being recipient of services, will be eligible to claim input tax credit (hereinafter referred to as the “ITC”) of the GST so charged by the dealer.

Scernario-3

When additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume.

Then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer. This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer, for the purpose of arriving value of supply, in the hands of the dealer, under section 15 of the CGST Act. The customer, if registered, would be eligible to claim ITC of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer in view of second proviso to sub-section (2) of section 16 of the CGST Act.

Scernario-4

Where post-sales discount granted by the supplier of goods is not permitted to be excluded from the value of supply in the hands of the said supplier not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act.

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. Dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods. 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.