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

Under GST, the treatment of discounts is governed by Section 15 of the CGST Act, 2017. The value of supply excludes discounts under certain conditions:

• Pre-Supply Discount: If the discount is provided before or at the time of supply and is mentioned in the invoice, it is subtracted from the taxable value of the supply. For example, if a seller offers a 20% discount on goods worth ₹1000, the taxable value will be Rs 800 (Rs 1000 - Rs 200).
• Post-Supply Discount: Discounts provided after the supply is made are allowed only if they are explicitly mentioned in the agreement entered before the supply. They must also be linked to the specific invoice and, in such cases, the recipient must reverse the input tax credit attributable to the discount.
• Cash Discounts: Similar to trade discounts, cash discounts are treated the same under GST and can be deducted if provided in the invoice or in terms of a prior agreement.
• Ad-hoc Discounts: Post-supply discounts that are not pre-agreed upon or are provided without any formal documentation cannot be subtracted from the taxable value of the supply.

The valuation of supply under GST article explains how GST will be calculated and what will be applicable on value of supply. This article explains how discounts will impact valuation of supply under GST.

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 ABC 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 ABC pays within 7 days.

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 ABC 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 ABC to pay within 2 days. It offers additional 1% discount. ABC 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

Treatment of discounts under pre-GST era

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.