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Trade Discount

In Indian context giving trade discounts and price reductions during negotiations after supply of goods and services is very common in business. However, if such post supply discounts were not anticipated at the time of supply, it is not allowed to be deducted from value. This provision completely ignores business reality as post supply negotiations and price reductions are common in business. In GST structure, other kind of disbursement of discount, such as redeeming loyalty points or giving freebees, turnover discount, special discount, quantity discount could create operational challenges if the supplier desires to consider such discount for computing his GST liability.

The tax treatment of Trade discount in the GST regime: Let us first refer to the relevant provision of the CGST Act. Section 15 of the CGST Act deals with the provision of discount, as under:

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.”

A plain reading of the Section leads us to the following logical inference:

a. Discount, if mentioned on the face of the invoice, can be reduced from the taxable value of the supply of goods.
b. Discount, even if not mentioned on the face of the invoice can be reduced from the taxable value, if certain conditions are satisfied:

i) Discount is established in terms of an agreement before supply. In simple words, both supplier and recipient are aware and have agreed about the discount before the supply.
ii) Discount is linked to a specific supply invoice.
iii) Input Tax credit attributable to the discount is required to be reversed by the buyer or recipient of the supply.

GST liability of the supplier would be reduced if both supplier and receiver of the goods or services are aware of the discount before supply. Further, the impact of the mode of disbursement of discount could be summarized as under from a GST perspective:

* If the Trade discount is disbursed at the time of supply then the same should be shown on the invoice and GST would be computed on the value net of Trade discount.

Example 1:

Zodiac Traders is in a business of trading packing materials like corrugated Boxes, polythelyne bags, pallets etc. Zodiac sells 100 Boxes to a ABC Company for Rs. 10,000, they were agreed upon 2% Trade discount on Basic price.

Details Amount Rs.
Sale of Packing Materials 10000/-
Add:
Insurance 500/-
                                   Total 10500/-
Less:
Discount @2% (On Sale Value i.e. Rs. 10000/-) 200/-
Subtotal 10300/-
Add: Taxes
CGST @ 9% 927/-
SGST @ 9% 927/-
Invoice Total 12154/-

 

* If discount is disbursed at a later date, then credit note should be issued and the same credit note should be linked to the supply invoice and the recipient of should reverse the Input Tax Credit attributable to such discount.

Example 2:

Continue with the above example, if the trade discount of Rs. 200 is being allowed after the sale has been effected, on satisfying the conditions as mentioned above, the Zodiac Traders can raise a credit note for the amount of trade discount along with the GST thereon, and the ABC Company will raise a corresponding debit note. This way, the Zodiac’s value of the supplies for the month will be reduced by Rs. 200 for that month and consequentially he will not be paying GST on the discount, subject to following conditions are satisfied:
Existence of pre-defined agreement between Zodiac Traders and ABC Compnay prior to making the said trade discount given by Zodiac Trader can be mapped to invoices to which it pertains. ABC Compnay has reversed the ITC with respect to this Rs. 200, in case he has claimed ITC on the whole amount of Rs.10,000/-

This provision in the new tax regime made the intention of the legislation clear and uniform across the country. However, execution of the provision makes the issue complicated. This is because the supplier’s benefit is completely dependent on an action or inaction, with regard to reversal of Input Tax Credit, of the buyer. A supplier does not have any control over the buyer’s actions on the treatment of discount in his books.

In the GST regime all transactions are recorded through GSTN portal. Accordingly, a mechanism which could possibly be explored in order to effectuate post supply discount is a process wherein the credit note (on account of discount) uploaded by the supplier would automatically reduce the Input Tax credit of the buyer.

The nomenclature or method of disbursement of discount would not have any impact of such discount for computation of tax liability of the supplier. The intent or commercial arrangement between the supplier and recipient would decide whether the discount in relation to any supply could reduce the GST liability of the supplier to the extent of such discount.

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One thought on “Trade Discount related Guide in GST Regime

  1. Kanti says:

    Hi,

    We are billing to a B2B customer (a registered GST customer) A worth Rs.1000 + 5% GST =Rs. 1050, and receive payment of Rs.970/- from agency B, who is the payment collecting/bill discounting agency for Customer A. Agency B and the supplier (us) have entered into an agreement that they will charge 3% for payment collection & bill discounting services. Is the transaction valid, since Customer A is getting Rs.50 of input credit on purchase of Rs.1000 of goods, whereas supplier is only receiving Rs.970? There is no generation of a credit note here since Agency B is taking Rs.30 as their fees. However, Agency B is raising a GST invoice worth Rs.30 for their service charges.

    Please advice proper paperwork to be followed & mention what the GST law says in this regard.

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