Post-Sale Discount Under GST: Output Liability, Credit Notes & HSN Code

Post-sale discounts are reductions in price given by a seller to their buyers either during the transaction, after the sale is completed, or upon the achievement of specific targets. This article will discuss how post-sale discounts impact the value of supply under GST.

Treatment of Post-sale Discount under GST

Section 15(3) of the CGST Act 2017 specifies that a discount can be given before, after or during the time of supply.

A discount, given before or during the time of supply, must be recorded in the invoice to reduce the value of the supply.

If any discount is given after the supply is complete, then to reduce the discount from the value of the supply, the following conditions must be met:

1. Any discount given was specified in terms or agreements entered into during or before the time of supply.
2. Discounts shall be linked to specific invoices
3. The recipient shall reverse input tax credit attributable to such discount.

When a supplier provides a discount related to the volume purchased by the recipient, this activity shall be considered a separate supply of services. The recipient may invoice the discount amount and charge GST on such an invoice.

Where the above conditions are not met, the supplier can issue a financial credit note without charging GST. Accordingly, the recipient may claim the entire input tax credit charged on the original invoice.

Can Output Liability Arise on Post-sale Discount under GST

The impact on output liability on account of post-sale discount is as follows:

1. If a discount is given without any further actions required by the customer which are in line with terms decided at or before the time of supply, then such a discount will be reduced from the value of supply. The supplier will need to issue a credit note to reduce the output liability of the supplier.
2. A discount linked to the performance condition of the customer, for example, achieving a purchase target, will be regarded as a separate transaction. The customer will be treated as a supplier of services and will issue a separate invoice to the supplier equivalent to the discount entitled. 
3. When a supplier provides an additional discount to the dealer to offer a reduced price to the final consumer for increasing the sales volume. This additional discount will be referred to as a consideration from the supplier to the dealer.  
   
   Accordingly, if supplier requires the dealer to mandatorily pass the benefit to the customer, then the dealer will be required to pay GST on full value of supply (i.e., price offered to customer + discount received from the supplier). 
   
   When the dealer is not mandated by the supplier to provide a discount to the customer. Such a discount shall be treated as a commercial incentive, and the supplier will be required to issue a credit note. The dealer shall not adjust the value of supply for the final customer.
4. In cases where the discount given is not compliant with Section 15(3), then in such cases, the supplier can issue a financial or commercial credit note without affecting any GST liability. Accordingly, the input tax credit availed by the customer at the time of original supply will remain unaffected.

A Credit Note for Post-sale Discount under GST

To give an effect on the discount, the supplier must issue a credit note to the recipient. This credit note must be issued before 30th November of the following financial year or the date of filing the annual return, whichever is earlier. The effect of such a credit note shall be taken in the month of issuance.

Post-sale Discount under GST HSN Code

Discounts themselves do not have an HSN code, as they are a form of adjustment to the value of the original tax invoice. Hence, the HSN code mentioned in the original invoice shall also be mentioned in the credit note.

Post-sale Discount under GST – Example

Case 1: Mr A, a supplier, sold goods worth Rs 2,00,000 to his customer, Mr B. In addition to the goods, Mr A charges Rs 15,000 for shipping additionally. Mr A also offers a 2% discount on booking and an additional 1% discount if payment is made within 30 days.

Case 2: Mr B pays within 30 days; Mr A shall issue a credit note of Rs 2,107 along with GST. Since terms were agreed upon at the time of the transaction, this amount qualifies for deduction from the original value.

Case 3: Mr A has an agreement with Mr B which specified a special discount of 0.5% given only when aggregate monthly purchases exceeded Rs 10,00,000. In the next month, Mr B purchased goods worth Rs 15,00,000. Mr B is eligible for an additional discount of Rs 7,500 + GST. 

Case 4: Mr A provides an additional discount of 2% to Mr B to increase the sales, and Mr B is obligated to pass on such a discount to the final consumer, Mr C.  Mr B, which initially sold goods at Rs 10,00,000, after incentive from Mr A, sold goods at Rs 9,80,000 to Mr C.

Case 5: Assuming there is any discount/adjustment by the supplier which is not meeting any of the above conditions. Mr A can issue a commercial credit note to Mr B without charging any GST.