Introduction of GST in India’s tax structure has brought many changes in the system. In order to familiarise you with the current system, in this article, we are bringing to you information regarding changes in the GST discount regime.
Traders are more often than not offer discounts on their products for different purposes such as increase in sale quantity, immediate recovery of dues or debt, etc. Giving discounts has become kind of a normal trade practice. Under this circumstances there are several confusion among the traders over application of taxes on such discounts.
In this article, we are trying to clarify those doubts.
There are several types of discounts offered by a trader such as trade discounts, cash discounts, payment discounts etc. Taxes are not calculated taking into consideration different types of discounts but they are applied as per the timing of offering discounts.
Discounts are exempted from transaction value for the purpose of tax calculation in the following circumstances –
- If discounts are given before or at the supply of goods to the buyer.
- When discounts are given after supply of goods but the buyer knew about the discount even before the supply of goods.
Here, one thing to note is that in both the cases mentioned above, supplier and buyer both were aware of the discounts before the actual supply or movement of goods. This is important. Awareness of discount is important for it’s consideration in tax calculation.
Being a trader you must have known how taxes were applied if discounts offered on products at the time of sale in the pre-GST regime.
Before the introduction of GST in India, a series of indirect taxes were levied such as excise tax, service tax, VAT etc. Under all these indirect taxes, discounts on items on sale were allowed. However, VAT was applied differently on discounts in different states.
In pre-GST regime
Traders were allowed to give discounts on their products at the time of sale and taxes were calculated on the transaction value of the products excluding discount amount.
Applicability of taxes were as follows –
- For excise tax – Discounts were excluded from transaction value.
- For service tax – Likewise discounts were excluded from transaction value.
- VAT – In different states, VAT was applied differently on discounts as VAT was under the state’s jurisdiction. In some states, the discounts were excluded from transaction value and in others, it was included in the transaction value itself.
Under GST discount regime
Introduction of GST has brought many changes in our tax system. For the purpose of GST on discounts, now the law is uniform across the country. All states apply same formula for application of taxes on discounts given.
Here also, traders are allowed to give discounts to the buyer irrespective of type of discounts. Traders can offer any type of discounts such as trade discount, cash discount etc.
Application of GST on discounts varies with the timing of discount given to the buyer. As mentioned earlier in the article also, discounts are given at different stages of trade. They are –
- Discounts are given before or at the time of supply of goods.(Actual movement of goods).
- Discounts are given after the supply of goods .
In both situations, how the valuation of transaction value takes place and whether GST discount is allowed, are explained below in detail.
1. Discount given before or at the time of supply of goods: –
- When a trader gives a discount at the time or before the actual supply of goods then it is already known to the buyer. Hence, it is allowed.
- The sale agreement should also possess the details about any discount they maybe given in different circumstances.
- Knowledge of discount to both the party mainly the buyer is very important for the purpose of GST discount application.
- Here, in case of a discount has been given, the same should be explicitly mentioned in the invoice issued to the buyer.
- The invoice must contain a discount statement, then only it can be excluded from total transaction value for the purpose of calculation of taxes.
Valuation of supply
- Discounts are excluded from the main transaction value for GST calculation.
- Let’s say, price of a product is Rs 3000 and a discount of 10% is given, then GST will be applied in the invoice to the amount of Rs 2700 only as this is the sale value and rest Rs 300 was marked as discount.
- All these information should clearly be mentioned in the invoice.
- Let’s say a wholesale trader “A” deals in shoes.
- A buyer, say, “B” has come into agreement with “A” for the purchase of shoes.
- An agreement is reached between them for the sale of 1000 shoes, costing Rs 100 each.
- In the agreement itself, a discount of 10% was offered by the seller i.e. “A”.
- Now, the total sale value is 1000 × 100 = Rs 1,00,000.
- Discount offered at 10% is 1,00,000 × 10/100 = Rs 10,000.
- Let’s say GST apply on this item shoe is 18% i.e. 9% CGST and 9% SGST.
- Here, GST won’t be calculated on the whole amount of Rs 1,00,000. As a discount of Rs 10,000 has been offered so the actual transaction value would be Rs 1,00,000 – Rs 10,000 = Rs 90,000.
- GST would apply on amount Rs 90,000.
- For more simplification, see the table below how invoice would be prepared in this case.
|1000 shoes × 100 pc||1,00,000|
|Discount @ 10%||10,000|
|CGST @ 9%||8,100|
|SGST @ 9%||8,100|
Let’s say the invoice number shown above is ABC/18/111.
2. When Discounts are given after the supply of goods: –
In this case, application of GST happens in two ways –
a. Knowledge of discount is known to the buyer before the actual supply of goods.
b. Here, knowledge of discount is not known to the buyer before actual supply of goods.
We will discuss both points one by one.
a. Knowledge of discount is known before actual supply of goods: –
- It is normal that traders offer discounts to expedite the payment of dues.
- Hence, in the sale agreement itself trader and buyer both are made aware of the conditional discounts.
- As the buyer in this case, know about the discounts before the actual supply of goods, so, GST discount is allowed in this case too. Taxes will apply accordingly here.
- Here, two more things are necessary for the discounts to be excluded from actual transaction value. They are –
- The discounts offered later are traceable to the concerned invoice.
- Input Tax Credit(ITC) received by the buyer must be reversed by him.
- Let’s take the above example we discussed in earlier point to simplify this point.
- Trader A and buyer B came into agreement for sale of shoes.
- In the agreement itself, a discount of 10% was already mentioned.
- On the top of that, trader A also offered an additional discount of 1% if the buyer B pays the whole dues within 7 days of actual supply of goods.
- Here trader has offered this extra discount just to expedite the payment of dues. Likewise for different reasons traders offer discounts after supply of goods.
- In the above case, how the calculation of taxes will take place is mentioned below.
Valuation of GST
- Initially, the same invoice will be generated i.e. the above one as we are taking the same case as an example here.
- The invoice number is ABC/18/111. A sample is below.
|1000 shoes × 100 pc||1,00,000|
|Discount @ 10%||10,000|
|CGST @ 9%||8,100|
|SGST @ 9%||8,100|
- Now, if the buyer pays the whole dues within 7 days, he avails an additional discount of 1%.
- But this discount won’t be mentioned in the above invoice as that one was already generated.
- So what happens in this case is, the seller A will issue a credit note to the buyer B of amount equal to the marked price of total product i.e. shoes.
- Thereby, this 1% discount would value as Rs 1,000(1,00,000 × 1/100).
- The credit note of value Rs 1,000 must be specifically linked to the relevant invoice i.e. ABC/18/111.
- This credit note of additional discount of amount Rs 1,000 along with applicable GST on them must be sent by the seller A to the buyer B.
- And the trader or supplier “A” has to ensure the buyer “B” reverse the ITC of same amount so that the additional discount do not form the part of actual transaction value.
Important points: –
Here one thing to note is that, supplier or seller has burden of ensuring the reversal of ITC by the buyer in order to avail tax benefit on discounts and if the buyer does not agree for reversal then seller could do nothing and remain helpless.
The government, in this case, should make an amendment so as to ensure the seller, offering discounts after supply of goods, gets his due.
A provision can be made that seller instead of issuing credit more to buyer should upload the credit note linked with invoice to the Income Tax Dept. and the same amount should be deducted from Input Tax Credit(ITC) given to buyer.
b. Knowledge of discount is not known before the actual supply of goods: –
- Sometimes traders offer discounts to expedite the payment of dues but the same was not agreed upon before the actual supply of goods.
- In the sale agreement, this discount was not mentioned as it was not mutually agreed upon.
- In this case, the discount offered would not be excluded from the transaction value.
- Here, discount will form the part of total transaction value and hence incur GST on them.
- So no ITC would be reversed by the buyer also.
- The liability of that amount would totally fall upon the seller only.
- Taking the same example of the above case. Trader “A” and buyer “B” came into an agreement to sell 1000 piece of shoes.
- Under the agreement, only a 10% discount is offered that is also at the time of supply of goods. Apart from this, no extra discount is offered.
- Once the movement of goods has already taken place, no payment was made by the buyer at the time supply of goods.
- Buyer though agreed to pay the whole dues sooner.
- When 10 days passed and no payment was done by the buyer “B”, seller “A”, in order to expedite the payment of dues, offered a discount of Rs 2000 if the buyer pays the whole dues within next 5 days.
- This additional discount was not known to the buyer B before the supply of goods nor this was mentioned in the agreement.
- Hence, this discount will form the part of the transaction value and GST will apply on them. No waiver would be granted.
GST on discount is exempted only if the knowledge of discount is known to both the parties. It would not matter if the discount is given before the supply or after the supply of goods.
Only if the discount is given after the shot of goods and is not known to the buyer before then only discounts are not exempted from taxes.
For further information refer Company Vakil experts.