Valuation of Supply Under GST When You Give Discounts
Discounts are an integral part of business; offering trade and cash post-sale discounts is very common in the business. Trade discounts are given by businesses to boost sales, cash discounts are given to recover payments swiftly, and post-sale discounts are given if specific goals are achieved. This article explains how discounts will impact supply valuation under GST and GST calculation for the same.
| Tax |
Treatment Of Discount |
| Excise |
All discounts given on/before the time of sale are allowed. |
| Vat |
Different treatments in different states |
| Service Tax |
Allowed |
Taxable Value Or Transaction Value
In any law, the tax must be paid on the value subject to tax or taxable value. The value on which tax is to be assessed is the amount the recipient of goods or services agrees to pay the supplier of those goods or services. Such value, considered for a tax levy, is termed ‘consideration’ per the GST act.
According to GST Act section 15(2), taxable or transaction value comprises:
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Any taxes, tariffs, fees, or additional costs assessed separately (other than CGST, SGST, IGST).
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The amount by the recipient of goods on behalf of the supplier.
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Interests, late fees, or penalties for late payment
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Expenses include commission, packaging, loading and unloading expenses, and transportation which the supplier does before or at the time of delivery of goods.
Circumstances Under Which Discounts Will Be Allowed
Discounts after supply will only be accepted if:
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It is mentioned in the contract signed before the sale
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The recipient of the supply has reversed the input tax credit proportionate to the discount
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It can be tracked to the relevant tax invoice.
Concepts Of Discounts
The suppliers give various discounts such as cash, trade, quantity, volume, performance, etc. These discounts are deducted from the supply value or taxable value. GST is owed on the amount remaining after discounts are deducted since the transaction value constitutes the value of a taxable supply. However, not all discounts provided by the supplier to its clients are accepted as a value-based deduction. Only transactions that satisfy the conditions prescribed in section 15(3) of the GST act are allowed as seductions.
Discounts Allowed As Deduction From Value
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Discounts Given Before or At Time Of Supply: Such discounts are to be mentioned in the invoice separately. It will not be added to the value of supply. An example of such a discount can be offered by paying at the time of supply. Such discounts are recorded in the invoice; thus, GST is charged on the gross amount, and fewer discounts are recorded in the invoice.
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Discounts Given Post Supply: If the following requirements are met, post-supply discounts, or the discounts granted after the supply is made, are permitted as a deduction from the value of the supply. Discounts are in terms of the agreement between the supplier and recipient who entered an agreement where the discount is mentioned.
The recipient reverses the proportionate input tax credit. The buyer who claimed an input tax credit (ITC) for the GST due on the invoice's gross amount. As a result, the supplier gives him a credit note for the discounts.
The GST liability of the provider cannot be decreased if any of the requirements mentioned above are not met. To cover the cost of the discount, the supplier may instead issue a commercial credit note. In this instance, the buyer is not required to reverse any input tax credits.
To Summarise Discount
| Discount Given |
Allowed As Deduction From Transaction Value? |
| On or before the time of supply and recorded in a tax invoice |
Yes |
| After supply, but it was known before/at the time of supply and can be traced to the relevant invoice. |
Yes |
| Given after supply but not before or at the moment of supply (whether or not traceable to the relevant invoice) |
No |
Conclusion
In the pre-GST regime, the indirect taxes paid are included in the price on which tax/duty is charged. However, GST will be payable on all taxes other than the tax paid as CGST, SGST, or IGST. This may hamper the primary objective of GST in unifying taxes and removing the cascading effect of the taxes. For example, the decision was made to keep the basket of petroleum products, including crude, motor spirit (including ATF), and HSD, outside the GST.
Sales tax could continue to be levied by the states, and the centre would also continue its levies. This will affect industries that use petroleum products as inputs because they will not get any credit on the taxes paid on inputs. After further deliberations, the GST council will decide whether natural gas should be kept outside the GST.