DISCOUNTS ON GST

[Mr. M. GOVINDARAJAN]

Discount

The term ‘discount’ generally denotes ‘reduced prices or something being sold at a price lower than that item is normally sold for’.  Offering various discounts like cash discount, trade discount, volume discount, percentage discount etc., is the part and parcel of the sale promotion activities now-a- days.

The term ‘discount’ is not defined under GST laws.  Under GST law cash discount, trade discount, volume discount, percentage discount etc. are not bifurcated.  However, under GST, discount provisions are bifurcated under following two criteria-

• discount offered before or at the time of supply; and
• discount offered after the supply has been effected

Discount not include for valuation

Section 15(3) provides that 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.

Discounts given before or at the time of supply will be allowed as deduction from transaction value but the condition is that such discounts should be clearly mentioned on the invoice and/or should be properly documented by way of agreement/contract/booking document etc.   In case of quantity or volume discounts, where it may not be possible to mention discount in each invoice, the agreement becomes important document.

Discounts given after supply will be allowed only if-

• discount is established in terms of a pre-supply agreement between the supplier and the recipient;
• discount is linked to relevant invoices; and
• input tax credit attributable to the discounts is reversed by the recipient.

Secondary or post sales discount

Vide Circular No. 105/24/2019-GST, dated 28.06.2019 doubts have been clarified on treatment of GST on secondary or post-sales discount.   Previous to this circular the clarification was given on various doubts related to treatment of sales promotion schemes under GST vide Circular No. 92/11/2019-GST, dated 07.03.2019.   In the Circular dated 28.06.2019 four types of scenarios are considered and GST implication on those scenarios is clarified.

• Scenario 1. Discount given by the supplier of goods to the dealer without putting any obligation on him to do any activity like advertisement campaign, exhibition etc., would be related to the original supply and GST benefit will be allowed to the dealer on fulfillment of the condition laid down under section 15(3) of the CGST Act, 2017. If the conditions-
• such discount is established in terms of an agreement,
• the dealer should reverse the input tax credit,
• credit note should be raised within six months from the end of the financial year,

are fulfilled, the supplier of goods can raise credit note with applicable GST on it.

• Scenario 2. Discount given by the supplier of goods to the dealer with an obligation on him. The supplier of goods may ask the dealer to undertake activity like special sales, drive, advertisement campaign, exhibition etc., and for these purpose a discount is given by the supplier of goods as an incentive to the dealer. In this scenario the activity undertaken by the dealer shall be treated as a separate supply. The dealer is accordingly required of issue tax invoice with GST as a business support service. The tax invoice so received by the supplier of goods shall take input tax credit based on such invoice.
• Scenario 3. Discount is given to the dealer so that he in turn offers the discounted price to his customers. This is done to increase sales. On receiving discount from the supplier of goods the dealer tend to lower the price to be offered to his customer. It is clarified that the dealer will have to add back the discount part to the price offered to customer. The dealer will also require raising tax invoice on the supplier of goods for such discount. In nutshell the dealer is not required to reduce his price to customer if any discount is given by the supplier of goods.
• Scenario 4. Discount given to the dealer by way of financial/commercial credit note. The supplier cannot raise GST credit note i.e. credit note with GST, if the conditions laid down in GST is not fulfilled. The conditions being - the discount given post supply must be predetermined at the time of supply, the input tax credit should have been reversed by the dealer. And in case the credit note is issued after September from the end of the previous financial year the credit note cannot be issued with GST. It is clarified that though credit note is without GST the dealer can take full input tax credit of the original supply received by him from the supplier of goods.

Promotion scheme

IN RE: M/S. GOLDEN TOBACCO LTD. [2019 (6) TMI 1357 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA], the applicant is a seller of cigarettes.  The applicant’s factory, situated in various States, manufactures cigarettes and transfers the same on stock transfer basis to the applicant on payment of appropriate GST and Compensation Cess.  The cigarettes received by the applicant are further sold to their distributors.  The applicant is contemplating a promotion scheme for the clients/distributors wherein they intend to supply additional packs of cigarettes along with regular supply of cigarettes of a particular quantity, without receiving any additional consideration for the additional packs. 

The applicant sought for advance rulings on the following questions-

• In the above transactions, whether the extra packs of cigarettes would again be leviable to GST?
• If yes, the taxable value which can be attributed such extra packs of cigarettes for levy of GST?
• Whether extra packs of cigarettes would be considered as exempt supplies or free samples and hence attract the provisions of section 17(2) of the CGST Act read with Rule 42 or section 17(5) (h) of the CGST Act?

The Authority for Advance Ruling analyzed the circular No. 92/11/2019-GST, dated 07.03.2019 which clarifies on various doubts related to treatment of sales promotion schemes under GST.  The price range of the cigarettes of a pack of 10 will be in the range of Rs.50/- to Rs.200/-, depending upon the brand.  The MRP will be printed one pack of cigarettes.   However, as marketing strategy to counter competition, instead of supplying a quantity of say 100 packs for an agreed price of say Rs.5000/- they would be supplying 110 packs of cigarettes without recovering any additional cost from the distributors.  The applicant would be paying GST and compensation cess on Rs.5000/- at applicable rates.

The Authority for Advance Ruling ruled that-

• the extra packs of the cigarettes are not liable to GST.
• the extra packs of cigarettes would not be considered as exempt supplies or free samples and hence the provisions of section 17(2) read with Rule 42  or clause 17(5)(h) will not be applicable.

Special Discount

IN RE: M/S. SANTHOSH DISTRIBUTORS [2019 (11) TMI 223 - AUTHORITY FOR ADVANCE RULING, KERALA], the applicant is a distributor selling products to customers of principal by generating invoice on software controlled by the principal.  On such invoices special discounts being given to customer by principal on which the applicant has no control.  Thus the applicant received discounted amount from the customer but subsequently being reimbursed by principal through commercial credit notes.

The Authority for Advance Ruling ruled  that notwithstanding the applicant is liable to pay GST on special discounts given to customers by the Principal, such customers, if registered, are eligible to avail input tax credit only in respect of actual discounted price paid to distributor.    The Authority for Advance Ruling further held that since no discount has accrued to the applicant distributor and the principal is not eligible for deduction on invoice issued to the applicant full input tax credit is admissible to the applicant.  The applicant is not to reverse credit in respect of discount allowed to customers.

Volume Discount

IN RE: M/S. KWALITY MOBIKES (P) LTD. - 2019 (10) TMI 792 - AUTHORITY FOR ADVANCE RULING, KARNATAKA the applicant is in the business of supplying motor vehicles.  He is the authorized dealer for Harley-Davidson India who manufactures high end two wheeler motor cycles.  The applicant is in regular course of business purchases the vehicles from the authorized supplier wherein it charges 28% GST plus applicable cess.  The Authorized supplier allows credit period of 30 days and also fixes sales targets to the applicant.  Besides, on purchase of vehicles which are over and above the limit fixed on regular purchases, the applicant is also eligible for volume discount, which is paid on monetary terms.  

 The applicant sought for advance ruling on the following questions-

• Whether the volume discount received on purchases is liable for GST? If yes, under which HSN/SAC?
• Whether volume discount received on retail (on sales) is liable for GST? If yes, under which HSN/SAC?
• Whether the company has to issue taxable invoice to this effect?

The Authority for Advance Ruling ruled as follows-

• The volume discount received on purchases in the form of credit note without any adjustment of GST is not liable to GST.
• The volume discount received on retail (on sales) in the form of credit note without any adjustment of GST is not liable to GST.
• Since the amount received in the form of credit note is actually a discount and not a supply by the applicant to the authorized supplier, the applicant need not issue tax invoice for this transaction.

Discussions to this article

[Sandeep Bansal]

Circular No. 105/24/2019-GST dated 28.06.2019 stands Withdrawn vide Circular No. 112/31/2019 – GST dated 03-10-2019

[DR.MARIAPPAN GOVINDARAJAN]

Yes. Inadvertently omitted. Thank you sir for pointing out my mistake.

[Sandeep Bansal]

No Problem Mr Govindrajan....it is a well informed Article....thanks !!