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.
| 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.
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.
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.
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.
