Discount is a common practice in the trade & commerce. Discount can be cash discount or trade discount. A supplier may give discount in various modes such as upfront discount, staggered discount, periodic discount etc. While cash discounts are provided for faster recovery of the receivables, trade discounts are provided to augment the sales volume. Under the GST framework, discount can be classified broadly into two categories: (a) discount that are agreed between the supplier and recipient before or at the time of supply i.e. known at the time of supply (b) discount that are not agreed between the supplier and the recipient before or at the time of supply i.e. not known at the time of supply. If the supplier agrees to give discount to the recipient before or at the time of supply then such discount shall be deducted from the value of the said supply. Discounts can be given after effecting the supply only if there is an agreement entered into between the supplier & recipient at or before the time of such supply and specifically linked to relevant invoices. However, if the supplier does not disclose his intention to offer discount before or at the time of supply and after effecting the supply he suo moto gives some discount to the recipient, then such discount shall not be deducted from the value of supply.
Treatment of Discount
When discount is given before or at the time of supply
The value of the 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.
When discount is given after effecting the supply
The value of the supply shall not include any discount which is given after the supply has been effected, if the following conditions are satisfied-
- 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
- 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.
Example
- Mr A sales Product X at a price of Rs 100/- +GST per unit. As Mr B agrees to purchase 11 units of Product X, he offers Rs 100/- as discount. The said discount of Rs 100/- would appear on the face of the invoice and therefore need to exclude from the value of supply. Accordingly, taxable value would be Rs 1,000/- (Rs 1,100 – Discount Rs 100) and GST would be leviable on Rs 1,000/- only.
- Mr A sold goods worth Rs 10,000/- + GST 5% to Mr B. At the time of supply, Mr A agreed to provide a discount of Rs 100/- if Mr B makes payment within 7 days from the date of invoice. As the discount was agreed upon between the parties before the supply, if Mr B makes payment to Mr A within 7 days, then Mr A will issue a credit note for Rs 100/- + GST Rs 5/- for giving effect of the discount. Issuing the said credit note Mr A would reduce his output tax liability by Rs 5/- and Mr B need to reverse his input tax credit pertaining to this transaction by Rs 5/-. However, if Mr A was silent about the discount at the time of supply and he suo moto gives a discount of Rs 100/- to Mr B at the time of making payment, then such discount would not qualify for exclusion from the value of supply. Therefore, value of supply in this case would be Rs 10,000/- and credit note u/s 34 of the CGST Act, 2017 can not be issued.
Discounts including ‘Buy more, save more’ offers
To attract more customers, sometimes suppliers offer discounts in slabs e.g. 10% discount on the purchase above Rs 10,000/-, 20% discount on the purchase above Rs 20,000/- etc. As such discounts are shown on the face of the invoice, they do not form part of the value of supply. Accordingly, GST would be levied on the net value. Further, suppliers also offer periodic / year end discounts. Such discounts are established in terms of an agreement entered into at or before the time of supply and specifically linked to relevant invoices. They are not shown on the invoice as the actual quantum of such discounts are determined after the supply has been effected and generally at the year end. Such discounts are given by way of credit notes. The CBIC vide the Circular No. 92/11/2019 dated 07.03.2019 clarified this issue as below:-
i. 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. 5,000/-, 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.
ii. Some suppliers also offer periodic / year ending discounts to their stockists, etc. For example- Get additional discount of 1% if you purchase 10,000 pieces in a year, get additional discount of 2% if you purchase 15,000 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.
iii. 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 subsection (3) of section 15 of the said [CGST] 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.
iv. 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
Secondary discounts are not known at the time of supply or are offered after the supply has been effected. In case of such discount, credit note(s) under sub-section (1) of section 34 of the CGST Act can not be issued as the conditions laid down in clause (b) of the sub-section (3) of section 15 of the CGST Act are not satisfied. However, the supplier can issue financial/ commercial credit note(s) in case of such discounts. Where supplier has issued such financial/commercial credit note(s), the recipient need not reverse his input tax credit. The CBIC vide the Circular No. 92/11/2019 dated 07.03.2019 clarified this issue as below.
Para iii of the said circular 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 CGST Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.
Para iv of the said circular 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 CGST Act are not satisfied.
Para v of the said circular clarified that value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para (iii) or by any other means, except in cases where the provisions contained in clause (b) of subsection (3) of section 15 of the CGST Act are satisfied.
Para vi of the said circular clarifies that there is no impact on availability or otherwise of ITC in the hands of supplier in this case.
Conclusion
If the discount was agreed upon between the supplier and the recipient prior to or at the time of supply, then such discount can be excluded from the value of supply. If discount was not known before or at the time of supply, then such discount shall not be excluded from the value of supply.