Advisory
Dated: 03.02.2020
Section 15(3)(b) of CGST Act 2017 (henceforth called the “Act”) states that:
The total value of supply shall not include any discount which is given after the supply has been effected, if-
- 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.
Thus, the required credit note shall be issued by the supplier reflecting the amount of discount not to be so included in the value of supply and corresponding tax on such amount if such discount is established in terms of an agreement entered into at or before the time of such supply. Hence, the liability of supplier shall stand reduced with the amount of tax on discount not to be so included in value of supply and recipient shall be liable to reverse the equivalent amount of tax from eligible ITC.
Post-Sales Discount can be categorised as follows:
- Volume Discounts, where terms of agreement w.r.t discount were established into before or at the time of supply:
Such discounts being established in terms of 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. Such discounts are passed on by the supplier through credit notes. Such discount satisfactorily complies with condition of section 15(3)(b), thus wouldn’t form part of value of supply.
Example:
Mr. A sold goods to Mr. B. Mr. B on fulfilment of certain conditions as established in terms of contract w.r.t quantity of goods sold approached Mr. A for post-sale discount. In such a case Mr. B shall issue a debit note to Mr. A reflecting the amount of discount and tax thereon based on which Mr. A shall issue a credit note with same amount of discount and tax. Thus, tax liability of Mr. A shall stand reduced with the amount of tax leviable on discount portion and Mr. B shall reverse the amount of ITC with the same amount of tax.
- Discount, where pre-agreement was not entered into w.r.t discount:
These are the discounts which are not known at the time of supply or are offered after the supply is already over. Circular No. 92/11/2019-GST dated 7th March, 2019 that 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. Credit Note u/s 34 (1) can be issued in this case even if conditions mentioned in section 15(3) are not satisfied. However, Secondary discounts shall not be excluded while determining the value of supply. There is no impact on availability or otherwise of ITC in the hands of the supplier.
Example:
Mr. A sold goods to Mr. B. Mr. B approached Mr. A for post-sale discount due to loss of certain resale contracts. In such a case Mr. A shall issue a financial credit note with amount of discount and tax. Neither the tax liability of Mr. A shall reduced with the amount of tax leviable on discount portion nor Mr. B shall be liable to reverse the amount of ITC on discount portion.
Where provisions of section 15(3) of CGST have not been complied with, Circular No. 92/11/2019 clarifies that supplier of goods can issue financial / commercial credit notes (u/s 34(1) of the Act) in such cases, but, he will not be eligible to reduce his original tax liability. Further, the buyer 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 as long as the buyer 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.