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Valuation of Supply under GST Part II- What happens when you give discounts?

Updated on :  

08 min read.

In the article on valuation of supply under GST, we have explained how GST will be calculated and what will be applicable on value of supply. In this article, we will discuss how discounts will impact valuation of supply under GST and GST calculation on the same.

Edit
TaxTreatment of discounts
ExciseAll discounts given on/before time of sale are allowed
VATDifferent treatment in different states
Service taxAllowed

Valuation of supply under GST-Discounts

Discounts given before or at the time of supply will be allowed as deduction from transaction value. Such discounts must be clearly mentioned on the invoice.

Discounts given after supply will be allowed only if

  • It is mentioned in the agreement entered into before sale AND
  • input tax credit proportionate to the discount has been reversed by the recipient of the supply AND
  • It can be clearly tracked to relevant tax invoice

Example 1

XYZ is a wholesaler selling tools like drills, polishers, spades etc. XYZ now sells the power drill to a trader TDR for Rs. 4,000 offering a 1% discount. XYZ incurs Rs. 150 packing charges To encourage prompt payment, XYZ offers additional 0.5% discount if WHL pays within 7 days.

Power Drill4,000
Packing charges150
Discount @1% (on sale value)(40)
Subtotal4,110
Add: CGST @9%370
Add: SGST @9%370
Total4,850

Discount of 0.5% is not deducted in the invoice because it will be given at the time of payment. However, this discount was known at the time of supply, and can be linked to this specific invoice, the discount amount can be reduced from the transaction value.

For this, XYZ Ltd will issue a credit note to TDR for Rs 20 (0.5% of Rs 4,000 = Rs 20+ GST@ 18% on Rs 20 = Rs 3.60), and this must be linked to the relevant tax invoice. Here, discount has been given after supply. But it was agreed upon at the time of supply and can be traced to the relevant invoice. So it will be allowed to be deducted from the transaction value.

When discount is given AFTER supply AND it is NOT KNOWN at the time of supply

Example 2

XYZ is facing serious liquidity problems and requests WHL to pay within 2 days. It offers additional 1% discount. WHL agrees and pays. This discount was not known at the time of supply, and so it cannot be claimed as a deduction from the transaction value for GST calculation. So the invoice will be same as above.

To summarize discounts

Discount is givenAllowed as deduction from transaction value?
On or before time of supply and recorded in tax invoiceYes
After supply but it was known before/at time of supply and can be traced to relevant invoiceYes
Given after supply but it was NOT agreed upon before/at time of supply (whether or not traceable to relevant invoice)No

Conclusion

In pre-GST regime, indirect taxes paid (like Excise) are included in the price on which tax/duty (say VAT) is charged. However, GST will be payable on all the taxes other than tax paid as CGST, SGST or IGST. This may hamper the very basic objective of GST in unifying taxes and removing cascading effect of taxes. For example tax on petroleum products: It was decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD will be kept outside GST.

Sales Tax could continue to be levied by the States and  Centre would also continue its levies. This will affect industries which use petroleum products as inputs because they will not get any credit on the taxes paid on inputs. GST council will take a final view whether Natural Gas should be kept outside the GST, after further deliberations.

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