Treatment of discounts under GST

To boost sales & to survive in the competitive environment and to attract new customers the companies usually provides the various types of discount schemes to their customers. Like trade discounts, quantity discounts, year end discounts etc. Some of the discounts are given at the time of supply or some of the discounts are given after the supply i.e., post sales discounts. In this article, we are going to discuss the impact of different types of discount under the GST and the treatment of such discounts under GST laws and whether such discounts are to be shown under tax invoice or not.

Under CGST Act 2017 there is a section 15 which contains the provisions relating to the valuation of taxable supply. Sub-section 3 of section 15 talks about the discount. The said sub-section states that;
“3) 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”.

From the perusal of above, it is clear that if any discount is given before or at the time of supply and such discount is mentioned in the invoice then such discount should not to be included in transaction value for the purpose of GST. However, if such discount is given after the sales i.e., post sales discount and there exists an agreement for such discount & the said discount is linked to relevant invoices and ITC attributable to such discounts have been duly reversed by the recipient.

Till now we have obtained the basic understanding about the discount given either before or at the time of supply and the post supply discount. Now, we are about to discuss in detail about the different types of discounts that can be given by the company. Some examples of such discounts are as follows;
(i) trade discount at the time of supply
(ii) purchase discount i.e., additional discount of 5% on purchase worth of Rs. 10,000/- or more
(iii) special discount for making full payment in advance
(iv) get 10% discount on purchase worth of Rs. 50,000/- and above, 15% discount on purchase worth of Rs. 80,000/- and above
(vii) buy three and get one free

From the different types of discounts as mentioned above it can be seen that such type of discounts are known to the customers at the time of supply in other words the customer is already aware about these. We can also see such types of discounts in our day to day life. As the conditions stipulated in section 15(3)(a) of the CGST Act, 2017 are being satisfied in above mentioned discounts, accordingly the value of supply shall not include such discounts.

In addition to the above there are some discounts which are not known at the time of supply. The examples of such discounts are as follows;
(i) Additional discount of 3%, if payment being made within 10 days from the date of invoice
(ii) Special discount of 5%, for meeting the yearly purchase target by a recipient (distributers, dealers etc)

As all two types of these discounts are post sales discount, as per section 15(3)(b) if there exists an agreement for such discounts & the said discounts are linked to relevant invoices and ITC attributable to such discounts have been duly reversed by the recipient(s). Then such discounts should also not form part of the taxable value.

After understanding the different types of discounts offered by the company, now the question arised that whether the supplier of such goods or services would be eligible to claim the ITC in respect of goods or services used in such samples/free gifts which are provided as free of cost by the supplier? In this regard the CBIC vide Circular No. 92/11/2019-GST has given the clarification on the aspects of taxability, valuation or availabilty of Input Tax Credit in the hands of the supplier in relation to the various discount schemes like (Free samples and gifts, Buy one get one free offer, Discounts including Buy more, save more offers and secondary discounts. The clarification given under said circular in respect of these schemes are summarised as follows;

Free samples and gifts: In respect of the free samples and gifts provided by the company to their customers, it was clarified that as the samples which are supplied free of cost i.e., without any consideration hence it would not qualify as supply under GST, except where the activity covered in Schedule I of the CGST Act. Further as per 17(5)(h) of CGST Act 2017, ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it was clarified that ITC would not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free sample. However, the ITC would be available where the activity of distribution of gifts or free samples falls within the scope of supply due to the provisions contained in Schedule I of CGST Act.

Buy one get one free offer: In case of Buy one get one free offer, prima facie it appears that one item is being supplied free of cost without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. The taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of CGST Act i.e., if it is a composite supply then the rate of tax would be the rate as applicable on the principal supply and if it is a mixed supply then the rate of tax would be the rate of that particular supply which attracts higher rate of tax. Regarding the eligibility of ITC to the supplier it was clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply as part of such offers.

Discounts including “Buy more, save more” offers: In respect of Buy more, save more offer and post supply / volume discounts established before or at the time of supply it was clarified that such amount should be excluded to determine the value of supply provided that the conditions of section 15(3) are being fulfilled. It was further clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to supply being a part of offer.

Secondary Discounts: These are the discounts which are not known at the time of supply or are offered after the supply is already over. Hence the confusion arised that whether credit notes can be issued in such cases even though the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In this regard it was clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions of section 15(3)(b) are not satisfied. It was further 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 of section 15(3)(b) are not satisfied. Also it was clarified that there is no impact on availability of ITC in the hands of supplier in this case.

Conclusion
From the above detail discussions, it can be concluded that in case of discount which are known at the time of supply then would not form part of the value of supply if such discount is included in the tax invoice. In case of post sale discounts, if there is a prior agreement in this regard & such discount is specifically linked to the invoices and ITC in respect of the same has been reversed by the recipient of supply, then it would not form part of the value of supply.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.