GST on Discount : With examples

By | December 4, 2018
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(Last Updated On: December 4, 2018)

GST on Discount

GST will be calculated and what will be applicable on value of supply as per Section 15 of CGST act 2017 . GST on Discount will charged as per provision mentioned in Section 15(3) of CGST act 2017

Relevant Portion of Section 15(3) of CGST Act 2017 :-

The value of the supply shall not include any discount which is given—

(a)before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b)after the supply has been effected, if—
(i)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
(ii)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.

Video Lecture on GST on Discounts

 Discounts given before or at the time of supply

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.

Example ABC ltd  is a wholesaler selling machinery tools.  ABC now sells the machines  to a trader (DEF ltd )  for Rs. 4,000 offering a 1% discount. ABC incurs Rs. 150 packing charges

Suppose Tax Invoice No 11 Dated 04.04.2018 is raised as follow

Machinery Cost4,000
Packing charges150
Discount @1% (on sale value)(40)
Subtotal4,110
Add: CGST @9%370
Add: SGST @9%370
Total4,850

 Discounts given after supply ( But Known before or at the time of Supply

Example ABC ltd  is a wholesaler selling machinery tools.  ABC now sells the machines  to a trader (DEF ltd )  for Rs. 4,000 offering a 1% discount. ABC incurs Rs. 150 packing charges

To encourage prompt payment, ABC offers additional 0.5% discount if DEF Ltd pays within 7 days.

Suppose Tax Invoice No 12 Dated 05.04.2018 is raised as follow

Machinery Cost4,000
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.

How this discount can be passed on :-

For this, ABC Ltd will issue a credit note to DEF Ltd for

Rs 20 (0.5% of Rs 4,000) = Rs 20

CGST@ 9% on Rs 20 =         Rs 1.8

SGST @ 9%on Rs 20 =         Rs  1.8

Total                            =          Rs 23.60

and this credit not must be linked to the relevant tax invoice No 12 dated 05.04.2018

.
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.

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.

Discounts given after supply ( But Not Known before or at the time of Supply)

Example -1

ABC is facing serious liquidity problems and requests DEF Ltd to pay within 7 days. It offers additional 1% discount. DEF 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.

Example-2

A company decided to gave discounts of Rs 5000 to its Dealers on selling 800 boxes of goods. This condition was not mentioned in the agreement or at the Time of Supply of boxes to dealers.

Can the Company issue Credit Note for this discounts  of Rs 5000 under GST Act and thereby reduce GST charged from dealers ?

Relevant Portion of Section 15(3) of CGST Act 2017 :-

The value of the supply shall not include any discount which is given—

(a)before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b)after the supply has been effected, if—
(i)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
(ii)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.

As per Section 34(1) of  CGST Act 2017   Credit and debit notes .Where a tax invoice has been issued for supply of any goods or services or both and

  • the taxable value or tax charged in that tax invoice is found to exceed the
    • taxable value or
    • tax payable in respect of such supply, or
  • where the goods supplied are returned by the recipient, or
  • where goods or services or both supplied are found to be deficient,

the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed.

Comment : section 34(1) of CGST and SGST Act do not make provision for issue of credit note for passing of discount which was not contemplated before or at the time of supply.

Q what is the meaning of “discount linked to specifically linked to relevant invoices ” under Section 15 of  CGST act  ?  Pls give example when discount will be said to be LINKED TO RELEVANT INVOICE ? 

Relevant Portion of Section 15(3) of CGST Act 2017 :-

The value of the supply shall not include any discount which is given—

(a)before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b)after the supply has been effected, if—
(i)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
(ii)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.

Example : Suppose Invoice No 10 is issued for Rs 100 + Rs 18 GST and later on against such invoice 10% discount is granted, the discount will be Rs 10 and GST thereon will be Rs 1.80 and the credit note will refer to the Invoice No. 10.

Why issuing and receiving credit Note is mandatory ?

As far as possible, credit note should be issued with GST.

If this is not possible, simple credit note should be issued without claiming reduction in GST.

This is because if such credit note is not issued, it can be said that the buyer has not made full payment. In that case, the recipient will have to reverse proportionate Input Tax Credit.

Valuation in GST : Free Study Material

GST on Discount

Refer Also Govt GST Website

 

Direct Taxes Ready Reckoner
Service Tax Ready Reckoner
Company Law Ready Reckoner
tax deduction at source

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