These days controversy over passing of discounts on invoice or otherwise than by discounts alongwith gifts has invited lot of controversy and somewhere gifts and discounts are seen on similar lines by the supplier where a benefit to be passed on to another person is sometime passed on by way of discounts or at other times it is passed on by way of gifts. The article tries to analyse treatment of discounts for the purpose of levy of tax in GST Regime.
a) What is the value of supply upon which tax shall be levied:
Section 15(1) of the CGST Act, 2017 provides that
- Value of a supply of goods or services or both shall be the transaction value.
- The transaction value shall be the price which is actually paid or payable for the said supply of goods or services or both.
- However, for considering price actually paid or payable as transaction value and ensuring that the transaction value is free from impact of the arrangements which yield a price below the normal price, two additional conditions need to be satisfied which are as follows:
- Supplier and recipient of the supply are not related and
- Price is the sole consideration for the supply.
Once the above conditions are satisfied then price actually paid or payable by recipient to the supplier for supply of goods or services shall be the value on which tax shall be levied.
b) Whether the Act makes any distinction between nature of Discounts or their terminology:
The act does not make any distinction between discounts. The discounts can be cash discount, special discount, trade discount, quantity discount or by any nomenclature. CGST Act only divides the discount into two forms i.e. Discount passed before or at the time of supply and Discount passed after supply has been affected.
It would be apt to highlight that under the VAT Regime even if discount in a particular sale transaction was predetermined at the invoice stage but if it was not passed on invoice i.e. post sale discount, deduction being allowed from transaction value was under litigation and it was putting the sellers who were passing discount subsequent to the sale in an inferior position than the sellers passing discount at the invoice stage.
Some of the Landmark decisions in this matter were as follows wherein the issue was decided in favour of the seller for post sale discount:
Hon’ble Apex Court in the matter of M/S. SOUTHERN MOTORS .…APPELLANT Versus STATE OF KARNATAKA AND OTHERS …RESPONDENT WITH Civil Appeal Nos. 10972-10978 of 2016 held that
“To reiterate, trade discount though an admitted phenomenon in commerce, the computation thereof may depend on various factors singular to the parties as well as by way of uniform norms in business not necessarily enforceable or implementable at the time of the original sale. To deny the benefit of deduction only on the ground of omission to reflect the trade discount though actually granted in future, in the tax invoice/bill of sale at the time of the original transaction would be to ignore the contemporaneous actuality and be unrealistic, unfair, unjust and deprivatory. This may herald as well the possible unauthorised taxation even in the face of cotaneous accounts kept in ordinary course of business, attesting the grant of such trade discount and adjustment thereof against the price.”
Similarly in the matter of Union of India and Others v. Bombay Tyres International (P) Ltd., (2005) 3 SCC 787, Hon’ble Apex Court defined trade discount and held it to be deductible from the sale price:
“(1) Trade discounts – Discounts allowed in the trade (by whatever name such discount is described) should be allowed to be deducted from the sale price having regard to the nature of the goods, if established under agreements or under terms of sale or by established practice, the allowance and the nature of the discount being known at or prior to the removal of the goods. Such trade discounts shall not be disallowed only because they are not payable at the time of each invoice or deducted from the invoice price.”
Andhra Pradesh High Court in Godavari Fertilizers and Chemicals Ltd. v. Commissioner of Commercial Taxes, (2004) 138 STC 133, came to the conclusion that a discount given by means of credit notes issued subsequent to the sale is as much a trade discount admissible to deduction in determining the turnover of a dealer.
CGST Act, 2017 provides deduction of discount from the transaction value whether it’s pre-supply or at the time of supply or after the supply has been affected. Therefore the controversy of discount passed on invoice before or at the time of supply or after the supply has been affected seems to have been settled down under GST Regime as compared to VAT Regime.
c) When value of supply shall not include discounts given by the supplier to the recipient: Section 15(3) of CGST Act, 2017
Section 15(3) of the CGST Act, 2017 provides that value of supply shall not include discount given by the supplier to the recipient in two situations which are as follows:
Situation 1: Discount given before or at the time of supply –Section 15(3)(a) of CGST Act, 2017
- Condition 1:- The discount should be given before or at the time of supply.
- Condition 2:- Such discount shall be duly recorded in the invoice issued in respect of such supply. One of the key conditions to be observed that the deduction towards the discount in only available wherein
- Discount is duly recorded on the Invoice and the
- It is in respect of the supply.
If the discount recorded on the invoice is not in respect of the supply reflected on the invoice, then the deduction would not be available.
Let’s try to understand the same with the help of an example:
1. A has supplied goods to B. Normal selling price of the goods is Rs 100.00. A provides a discount of Rs 10 to B and supplied the goods at Rs 90. In such case, as the discount is evident and duly recorded in the invoice, therefore such discount would be allowed as a deduction.
2. Many times discount relating to an earlier supply are passed on invoices of later date. If such discounts relating to an earlier supply are passed on the invoices of a later date, then deduction provided under this clause would not be available. In such case, supplier would have to opt for the procedure as prescribe under Section 15(3)(b) of the CGST Act, 2017.
A has supplied goods to B on dated 15th June 2018. Normal selling price of the goods is Rs 100.00. A supplied the goods at Rs 90. A gave a discount of Rs 10 to B towards an earlier supply made on dated 15th May 2018. In such case, the discount recorded on the invoice is not in respect of the supply, therefore such discount would not be allowed as a deduction.
Situation 2:-Discount given after supply has been affected: -Section 15(3)(b) of CGST Act, 2017
- Discount established in terms of agreement before or at the time of supply: The discount is established in terms of an agreement entered into, at or before the time of such supply. Therefore any discount which was not pre-decided but was fixed after the supply was affected, therefore would not fall under the ambit of this provision.
2. Discount linked to specific invoices: The discount shall be specifically linked to relevant invoices. Therefore, any reduction in the price should specify the invoice for which the discount has been passed.
3. Recipient should have reversed the input tax credit:
The recipient should have reversed the input tax credit as attributable to the discount on the basis of document issued by the supplier. Let’s try to understand the same with an example:
A has entered into an agreement with B for supply of Sugar candy. The agreement provides that if B would make an offtake of 2000 sugarcandy in one month, he would provide an off take discount of 2% on entire off take made by B during the month. B makes an off take of 2500 sugar candy during the month on three invoices as follows:
|Particulars||Candies||Total Price||GST||Gross Total|
Now A would issue a credit note to B on all the invoices issued during the month and would also reverse tax levied on such invoices.
|Particulars||Candies||Total Price||GST||Gross Total|
B would have to reverse Input Tax Credit of the tax Levied by A in the earlier invoices.
Let’s try to understand the different scenario with the help of above example:
Case Study-1: Recipient reverses the input tax:
Supposedly in the above example, if B reverses input tax credit, therefore A would be able to reduce the discount passed to B from the transaction value for the purpose of levy of tax on the supply.
Case Study-2: Recipient does not reverse the input tax:
Supposedly in the above example, if B does not reverse input tax credit, therefore A would not be able to reduce the discount passed to B from the transaction value for the purpose of levy of tax on the supply.
Case Study 3: Recipient is an unregistered person or a person under composition scheme
The value of the 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
The supplier needs to satisfy both the condition before it can claim any benefit under the provision. The important point to be considered in the second condition which has been highlighted is what happens in case wherein B in the above example is
- A consumer,
- A person not registered under the GST Regime, or
- A person who has opted to pay composition levy in lieu of tax.
In such cases, neither the recipient has availed any input tax credit and nor he can reverse the input tax credit. Therefore, if condition as regards reversal of input tax credit attributable to supply has not been fulfilled, whether supplier would be able to reduce the discounts from the transaction value.
In my view, the section uses the language “input tax credit as is attributable to the discount” should have been reversed by the recipient of the supply. The section does not uses the words “tax attributable to the discount should have been reversed”. Therefore, input tax credit if any attributable to the supply should have been reversed by the recipient. If no input tax credit has been claimed by the recipient, then in such case no reversal is required to be made by the recipient. The law intends to plug the situation wherein the supplier has reduced the discount from the transaction value and has not paid the tax but the recipient has not reversed the credit thereon. In such case there would be loss of revenue to the exchequer in terms of input tax credit allowed even though no tax has been paid on such supply.
However, wherein no tax credit has been taken by the recipient or recipient is not eligible to claim the credit then in such case there is not “input tax credit attributable to such supply” and therefore no reversal is required to be made and the second condition would deemed to be fulfilled without coming into the fray.
d) Rationale of Situation 1 i.e. Discount given before or at the time of supply and Situation 2 i.e. Discount given after the supply has been effected:
It’s important to understand the rationale of Situation 1 and Situation 2 and why the same has been inserted in the GST Regime. At the outset, one thing is clear that if the discount is given to the recipient at or before the time of supply and which has been duly recorded on the invoice, it must have been decided before or at the time of supply. There cannot be a situation where in such discount was decided subsequent to the supply. This is situation 1. Now if the discount is pre-decided by an agreement and can be linked to individual invoice but supplier has either due to his convenience or part of trade practice or check of fulfillment of certain conditions, chose not to pass the discount on the invoice and has passed is subsequent to supply. This is Situation 2.
Thus, the common thing running in the both the conditions is, that the discount should be pre-decided at or before the time of supply and it should be linked to relevant invoice. If both the conditions are satisfied then in such case it does not matter if the same is passed on invoice before the supply has been effected or after the supply has been effected with an additional condition in case of passing of discount after the supply has been effected that the recipient should have reversed the input tax credit attributable to such discount. It is at the option of the supplier when and how he intends to pass on the benefit of discount to the recipient. The Act does not makes any difference between the two situations and treat them at par.
The rationale of such condition can also be traced as if such discount had been passed on invoice, recipient would not have the benefit of availment of credit and if the discount is passed after the supply has been effected then the recipient would have once availed the entire credit and after availment of the credit if supplier reduces the same from his liability then the recipient should first reverse the credit and then only supplier would be entitled for reversal of credit. If the recipient has not availed any credit then in such cases there is no question of any reversal and therefore the exchequer would be having the same revenue if such discount would have been given before or at the time of supply or has been granted subsequent to the supply.
e) Is the claim of deduction of value discount from transaction value mandatory at the option of the supplier
Consider an Example wherein Suresh has supplied goods to Ram for Rs 100. The Tax Rate on goods is Rs 20%. It was pre-decided that Suresh would give a discount of 10% on the sale price to Ram. There can be following situations which are depicted herein with the help of a Table presuming that the conditions as prescribed under section 15(3) have been fulfilled:
|Particulars||Discount passed at or before the supply|
|Deduction from Transaction Value before levy of tax- Section 15(3)(a)||Deduction from Value after levy of tax|
|Less: Discount passed on Invoice before Levy of Tax||10||–|
|Tax @ 20%||18||20|
|Less: Discount Passed on after levy of Tax||–||10|
|Particulars||Discount passed after supply has been affected|
|Deduction from Transaction Value -Section 15(3)(b)||No Deduction clamed from Transaction Value|
|Less: Discount passed on Invoice before Levy of Tax||–||–|
|Tax @ 20%||20||20|
|Discount passed post supply through Credit Note||10||10|
|Tax Reversed through Credit Note||2||–|
Now in both the tables i.e. Table 1 and Table 2, we can observe that if the supplier chooses to reduce the value of discount from the transaction value as per the provisions of Section 15(3)(a) and 15(3)(b), Net transaction value is Rs 90, Net Tax Collected is Rs 18 and the amount collected by the supplier post discount from the recipient is Rs 108.
However, if supplier chooses not to reduce value of discount from the transaction value as per the provisions of Section 15(3)(a) and 15(3)(b), Net transaction value is Rs 100, Tax Collected is Rs 20 and amount collected by supplier post discount from recipient is Rs 110.
The only difference between two transactions is that in one case supplier has reduced discount from transaction value and thereby tax of Rs 2 was also reduced and in other case, supplier opted not to reduce the discount from transaction value thereby tax of Rs 2 was not reduced.
Section 15(3) starts with the words as follows:
(3) The value of the supply shall not include any discount which is given––
The words used in the section are “shall not include”. The question now arises is whether this reduction of discount of Rs 10 from transaction value and consequential reduction of Tax liability of Rs 2 is mandatory for the supplier or its at the option of the supplier that whether he wants to reduce the discount from the transaction value or not.
Although the provision uses the words “shall not include”, but as it’s a beneficial provision and even though supplier fulfills all conditions as provided under section 15(3) of CGST Act, 2017, he may or may not opt to avail the deduction of discount from the transaction value for the purpose of levy of tax. The word “shall” should only come into play wherein the supplier opts for the deduction of Rs 10 from Rs 100 for the purpose of levy of tax.
Therefore, if the supplier intends to avail benefit of the deduction of Discount of Rs 10 from the transaction value of Rs 100 and then charge tax @ 20% on Rs 90, then he should be allowed to do so but if he opts to charge tax @ 20% on Rs 100 and then deduct discount, then in such case it would not be forced upon him to reduce the value of discount form the transaction value and reduce the consequential tax of Rs 2 from the transaction value.
Further, it has also to be understood that if the supplier does not fulfills the conditions as laid down under section 15(3), then such discounts are not allowed as a deduction from the transaction value and tax in above case would be mandatorily charged @ 20% on Rs 100 and not Rs 90.
Therefore, in my opinion, even after the supplier fulfills all conditions as prescribed under section 15(3) of CGST Act, 2017, it’s not mandatory from the point of the view of the supplier to avail the deduction of Rs 10 from the transaction value and consequential reduction of Rs 2 from the tax liability, he may opt chose to reduce the discount from transaction value or he may not opt to do so.