Recent GST Changes on Cash & Trade Discounts

With effect from 1st July 2017, Goods and Services Tax (GST) law has become operational and existing laws have been repealed.

GST (Goods and Service Tax) has replaced the system of multiple taxes imposed and collected by the centre and states. It is a notable change in the field of indirect taxes in our country.

GST is a multi-stage value added tax on consumption of goods and service. It amalgamates multiple taxes into one and various transitional provisions to navigate the transition of GST regime smoothly and hassle free. It also makes sure that no ITC (Input Tax Credit) benefits obtained in the existing regime were put in place.

Current Status of discounts in GST Regime

	Cash Discount	Trade Discount
Key Feature	1.    Given before conclusion of sale	1.    Given after conclusion of sale
	2.    Given to promote prompt payment	2.    Given Based on quantity purchased, Credit rating and payment period
	3.    May or may not be shown separately in invoice (Invoice value is shown net of discount)	3.    Given through issuing a Credit note
Treatment of GST	Outward GST Charged can be reduced	Outward GST can be reversed through credit note only if below conditions fulfilled:         A.    Discount is allowed as per the terms of sale Agreement entered before conclusion of sale         B.    The Customer reverses the ITC on discount received*

*The GST department has issued Circular No. 212/6/2024 dated 26th June 2024 enlisting the documents a suitable and admissible evidence for the purpose of section 15(3)(b)(ii) accepted by the department for ITC reversal by the customer. The same are mentioned in the article below

Concept of Discount

1.    With reference to the transaction of sale, a reduction in the sales value of any services or goods is defined as Discount.

2.    It is a common industry practice to give discounts to boost the sales of any product. To outperform their competitors and attract more customers, businesses offer various types of discounts. In commercial jargon there are 2 broad categories of discounts:

A.    Cash Discount: This is a type of discount given to the customer at the time of purchase of goods, usually this discount is only given to the customer who makes upfront payment of the goods purchase. This type of discount incentivises the customer to make prompt payments thereby maintaining the Working capital liquidity of the seller company.

B.    Trade Discount: This type of discount is usually given after the sales transaction is concluded. Based on general industry practice, trade discount can be further divided into two types:

• Quantity Discount: To increase the sales, companies offer a discount based on quantity of goods purchased by the buyer. Once the threshold limit (as agreed mutually between the buyer and the seller) during a pre-defined period (Month/Quarter/Year) exceeds, the seller offers a discount to buyer for all the quantities purchased during that period. The Seller passes on the discount to the buyer by way of issuing a credit note of the discount Value.
• Payment Discount: To propel the buyers to make timely payments, sellers offer discounts on making payments before the expiry of credit period to the buyer. The Seller passes on the discount to the buyer by way of issuing a credit note of the discount Value.

Discounts under GST Regime

1.    Although discount is matter of commercial prudence and mutual agreement between the buyer & the seller but since value of sales and GST Charged thereon gets reduced on issuance of credit note of discount value by the seller, hence it is necessary to evaluate the provisions of GST on discount.

2.    Central Goods and Service Tax (CGST) Act, 2017 does not define or directly deals with Discount. Rather, the GST Law defines Taxable Value, commonly referred to as ‘Sales Price’. As per the section 15 of the act, Taxable Value is defined as “the price actually paid or payable for the said supply of goods or services or both where the Seller and the recipient of the supply are not related and the price is the sole consideration for the supply.  

3.    As per Section 15(2), Taxable value includes the following:

A.    Any taxes, duties, cesses, fees and charges imposed under any law for the time being in force other GST (For Ex. VAT & Excise on certain goods)

B.    Any amount that the Seller is liable to pay in relation to such supply, but which has been incurred by the Buyer (Ex reimbursement of certain expenses);

C.    Incidental expenses, including commission and packing, charged by the Seller to the Buyer and any amount charged for anything done by the Seller pertaining to the supply of goods and services at the time of, or before delivery of goods or supply of services;

D.    Interest or late fee or penalty for delayed payment of any consideration for any supply; and

E.    Subsidies by central government and state government which are directly linked to the price excluding subsidies

4.    As per Section 15(3), Taxable value excludes any discount which is given:

A.    Before or at the time of the sale if such discount has been duly recorded in the invoice issued in respect of such Sale; and

B.    After the Sale has been affected, if –

• Such discount is established in terms of an agreement entered at or before the time of such sale and specifically linked to relevant invoices; and
• Input tax credit as is ascribable to the discount based on document issued by the supplier has been reversed by the Buyer.

5.    If the above provisions are seen in the light of common commercial knowledge, below is the status of Discounts and its impact on adjustment of GST on sales:

A.    Cash Discount: seller is allowed to reduce the sales value and the GST charged thereon provided that such discount is reduced in the invoice [Note: it is not necessary to separately show discount given, what matters is that the invoice value is shown net off discount].

B.    Trade Discount: Seller is allowed to reduce the GST Charged on the Discount offered after conclusion of a sale if & only if both of the below conditions are complied with

• Discount/Sales Agreement: The buyer & seller must have an agreement prior to offering such discount and reducing the GST on credit note issued for the discount
• Reversal of ITC: Before reducing the outward GST value on the credit note issued for the discount, the seller must make sure that the buyer has reversed the ITC corresponding to the discount value mention in the credit note.

Recent Pronouncement and changes

1.    In Most industries in India, sales are made on credit basis and huge year end quantity discounts as well as early payment discounts are offered to buyers. Since post sales discounts need to comply with section 15(3)(b)(ii) [need for the buyer to reverse ITC on credit notes of discount], hence the litigations related to provisions containing post sales discounts was very high.

2.    Therefore, representations were made by the trade and the field formations to the government mentioning that there is presently no facility available to the supplier as well as the tax officers on the common portal to verify whether the input tax credit attributable to the said discount has been reversed by the recipient or not.

3.    The Central Board of Indirect Taxes and Customs has issued Circular No. 212/6/2024 dated 26th June 2024, mandating that each company ensures that the customer reverses the ITC upon receipt of the Credit Note in order to maintain constancy and clarify the issue in the execution of the provisions of law across field formations As per the circular mentioned below are the documents which shall be considered as a suitable and admissible proof for the purpose of section 15(3)(b)(ii) accepted by the department for ITC reversal by the customer:

Tax Involved (INR) [CGST + SGST + IGST]	Requirement
Less than INR 5,00,000	A.    Self-Declaration / undertaking / certificate from the said recipient that the ITC attributable to such discount has been reversed by him B.    The undertaking shall include details such as: i.    The details of the credit notes ii.    the particulars of the relevant invoice number against which the said credit note has been issued iii.    The amount of ITC reversal in respect of each of the said credit notes iv.    The details of the FORM GST DRC-03/ return through which such ITC reversal has been made
INR 5,00,000 or above	A.    Certificate issued by the Chartered Accountant (CA) or the Cost Accountant (CMA) that the said recipient has reversed the ITC attributable to such discount B.    The certificate shall include details such as: i.    The details of the credit notes ii.    The particulars of the relevant invoice number against which the said credit note has been issued iii.    The amount of ITC reversal in respect of each of the said credit notes iv.    The details of the FORM GST DRC-03/ return through which such ITC reversal has been made C.    The CA/CMA certificate shall contain UDIN

Hence, it is advisable to the companies to maintain an invoice-wise track record of the invoices issued and the credit note raised for the respective invoice and obtain the Self declaration/ CA Certificate based on the above-mentioned limits.

Conclusion

Although the government has issued various clarifications regarding the reversal of outward GST on issuance if credit note for discount, but the litigation still exists with respect to the condition of prior agreement with customers, as the law also consider oral agreements and not all business houses enter into written agreements for discounts, but they issue discount credit notes. Further, the production of invoices as well as declaration will still be subject to scrutiny and rejection by the GST Department. Hence it is advisable maintain and produced comprehensive legal documents at the time of assessments.