Valuation of Supply Under GST When You Give Discounts

Discounts are a crucial part of many businesses, with trade and cash discounts often used to increase sales and recover payments quickly. Post-sale discounts may also be offered if certain goals are met. However, in the context of India’s GST system, discounts can have an impact on how the taxable value of goods or services is determined. Businesses must understand how discounts affect supply valuation under GST and the related GST calculations to comply with regulations and accurately calculate their tax liability.

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    Time Place and Value of Supply
    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

    When it comes to tax law, the tax is based on the value of the goods or services subject to tax, also known as the taxable value. This value is determined by the amount the recipient of the goods or services agrees to pay the supplier. In the GST Act, this value is referred to as the “consideration” for the tax levy.

    According to Section 15(2) of the GST Act, the taxable or transaction value includes:

    • Any taxes, tariffs, fees, or other costs assessed separately (excluding CGST, SGST, and IGST)
    • The amount paid by the recipient of goods or services on behalf of the supplier
    • Interest, late fees, or penalties for late payment
    • Expenses include commission, packaging, loading and unloading expenses, and transportation costs that the supplier incurs before or at the time of delivery of goods.

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    Circumstances Under Which Discounts Will be Allowed

    Discounts after supply will only be accepted if:

    • It is mentioned in the contract signed before the sale
    • The recipient of the supply has reversed the input tax credit proportionate to the discount
    • It can be tracked to the relevant tax invoice.

    Concepts Of Discounts

    Suppliers often offer various types of discounts, such as cash discounts, trade discounts, quantity discounts, volume discounts, performance discounts, and more. These discounts are subtracted from the supply value or taxable value. However, even after discounts are applied, GST is still owed on the remaining amount since the transaction value is what constitutes the value of a taxable supply.

    It’s worth noting that not all discounts provided by suppliers can be deducted based on their value. Only transactions that meet the conditions specified in Section 15(3) of the GST Act are eligible for deductions.

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    Discounts Allowed as Deduction from Value

    Discounts Given Before or At Time Of Supply: Discounts must be clearly stated on the invoice as separate items, and they are not added to the value of the supply. For example, a discount may be offered for paying at the time of supply. These discounts are recorded on the invoice, but GST is only charged on the net amount after the discount is applied.

    In other words, the GST is calculated based on the gross amount before the discount is applied, but the discount is still noted on the invoice as a separate item.

    Discounts Given Post Supply: Post-supply discounts, or discounts granted after the supply has been made, may be deducted from the value of the supply if certain requirements are met. These discounts must be part of the agreement between the supplier and recipient, and the agreement must specify the discount.

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    In addition, the recipient must reverse the proportionate input tax credit that was claimed for the GST due on the invoice’s gross amount. The supplier will provide a credit note for the discount to cover this reversal.

    If any of these requirements are not met, the GST liability of the supplier cannot be reduced. In such cases, the supplier may issue a commercial credit note to cover the cost of the discount. In this scenario, the buyer is not required to reverse any input tax credits.

    To Summarise Discount

    In this discussion, we have outlined the critical points that businesses should consider when offering discounts and how these discounts impact the determination of taxable value. Our goal is to assist businesses in complying with GST regulations, calculating their tax liability accurately, and claiming tax credits appropriately.

    Discount Given Allowed As a 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

    Determining the valuation of supply under GST when offering discounts can be a complex process that requires careful consideration and adherence to the rules set forth by the GST Council. It is important to understand the various types of discounts and their corresponding impact on the taxable value of the supply. The GST law provides specific guidelines for calculating the taxable value of supplies when discounts are given before or after the supply is made. It is crucial for businesses to be aware of these guidelines to ensure compliance with GST regulations and avoid potential penalties or legal consequences. Proper valuation of supplies is essential for businesses to maintain accurate records and remain compliant with GST regulations.

    Frequently Asked Questions

    • What is the Valuation of Supply under GST?
      The valuation of supply under GST refers to determining the transaction value or the price at which goods or services are supplied. According to GST law, the transaction value is the price paid or payable for the supply, excluding taxes like GST. It should include any additional costs such as packaging, transportation, and insurance, but exclude any discounts allowed.
    • How are Discounts Treated under GST?
      Discounts are generally subtracted from the transaction value when determining the taxable value for GST purposes, provided they are linked to the actual supply and are agreed upon in advance. Discounts can be of two types: pre-supply and post-supply. The manner in which discounts are treated affects the value on which GST is calculated.
    • What are Pre-Supply Discounts?
      Pre-supply discounts are discounts that are agreed upon before the supply of goods or services. These discounts reduce the transaction value of the supply and thus the GST liability. They are typically included in the invoice, and GST is calculated on the reduced price after applying the discount.
    • What are Post-Supply Discounts?
      Post-supply discounts are given after the goods or services have been supplied, often as rebates or incentives. These discounts reduce the taxable value of the supply and the corresponding GST payable, but they must be linked to the original invoice and provided in writing.
    • Are Trade Discounts Included in the Valuation of Supply?
      Trade discounts, which are typically offered based on the volume or value of goods sold and agreed upon in advance, are not included in the valuation of supply for GST purposes. The GST is calculated on the reduced price after applying the trade discount.
    • Do Cash Discounts Impact the GST Valuation?
      Cash discounts, offered for early payment or settlement of accounts, do not directly affect the GST valuation if the discount is given after the supply has been made and is mentioned in the payment terms. GST is calculated on the amount received after the discount is applied.
    • Is GST Applicable on the Discounted Price or the Original Price?
      GST is applicable on the discounted price, not the original price, provided that the discount is agreed upon before the supply or is linked to the actual supply. If the discount is post-supply, the GST liability will be adjusted to reflect the discounted price.
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