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Discounts under GST

In this article, we will discuss the impact of discounts under GST and its eligibility.

Table of Contents
Treatment of Discount in the previous indirect taxation regime
Treatment of Discount under GST
The Bottom Line

Treatment of Discount in the previous indirect taxation regime

Here is the treatment of discount in the previous taxation rule:

In the case of excise and service tax, all the discounts are given pre and post-sale are allowed. However, in the case of Value Added Tax, there is a different treatment of discounts in different states.

Treatment of Discount under GST

Discounts that are provided before supply under GST are eligible for deduction from the transaction value provided that such a discount is mentioned on the invoice. However, under GST, discount that is given post supply will be eligible when such condition is mentioned on the sale agreement/deed as well as sale invoice and when the ITC (Input Tax Credit) proportionate to the discount is reversed by the recipient.

Let us understand this with an example:

ABC is a wholesaler selling tires. ABC now sells the tires to a trader XYZ for 2,000 INR providing a discount of 1%.

ABC the wholesaler incurs 200 INR as packaging and handling charges.

To motivate the trader XYZ, ABC offers a discount of 0.5% if the trader pays within 14 days.

Tire sale value 2,000 INR
Packaging and Handling 200 INR
Pre – Discount on the sales value (1%) 20 INR
Subtotal 2,220
Add CGST @ 9% 200 INR (Approx)
Add IGST @ 9% 200 INR (Approx)
Total 2,620 INR

It shall be noted that the discount of 0.5% is not deducted from the invoice as it will be provided at the time of payment. However, it does qualify for deduction from the transaction value as this discount was known at the time of supply.

To deduct this discount from the transaction value of ABC needs to issue a credit note to XYZ.

The Bottom Line

Throught the below-mentioned table you can understand the treatment of discount under GST.

Particulars Deduction Allowed from the transaction value
Discount provided at the time of supply or before it as well as recorded in the invoice. The Discount is eligible for deduction from the transaction value.
Discount given after the supply but known before or at the time of supply as well recorded in the invoice. The discount is eligible for deduction from the transaction value. However, there will be two pre-requisite:

Credit Note needs to be issued by the supplier and Input Tax Credit needs to be reversed by the recipient of such supply.

Discount given by the supplier to the recipient that was not disclosed before or at the time of supply. Irrespective of whether it is recorded in the invoice or not. No, discount will not be eligible for deduction from the transaction value. Moreover, it shall be noted that financial and commercial note needs to be issued by the supplier and ITC (Input Tax Credit) needs not to be reversed.

Note:

The views stated above in this article is based on the writer’s understanding of laws and ciculars issued by the CBEC.