Treatment of Discounts Under GST

In order for any business to thrive, it often relies on various promotions such as trade discounts, volume discounts, freebies, special offers, and more, which are made possible with the support of taxpayers.Discounts play an integral role in business operations. Offering trade discounts, cash discounts, and post-sale discounts are common practices in the business world. Businesses offer trade discounts to boost sales, cash discounts to expedite payment collection and post-sale discounts when specific targets are met or as part of promotional schemes facilitated by distributors.

These measures are essential for organizations to capture market share, attract new customers and boost profits. While meeting these business requirements, taxpayers must also ensure compliance with all relevant laws and stay updated on any legal changes.

Discounts under GST regime

Section 15 of the CGST Act 2017, which is reproduced below, deals with the provision of discounts:

“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 a document issued by the supplier has been reversed by the recipient of the supply.”

The logical inference drawn from a plain reading of the above provision is:

Discounts mentioned on the face of the invoice can be reduced from the taxable value of the supplied goods. Even if discounts are not specified on the invoice, they can still be reduced from the taxable value if the following conditions are satisfied:

i) The discount is established through an agreement made before the supply, wherein both the supplier and the recipient have agreed upon the discount terms.

ii) Discount is associated with a specific supply invoice.

iii) The recipient or buyer of the supply is required to reverse the Input Tax Credit (ITC) attributable to the discount.

If both the supplier and the recipient of the goods or services are aware of the discount before the supply, the supplier's GST liability would be reduced, meaning GST would not be charged on the discount.

There will be no distinction in GST treatment between trade discounts and cash discounts. If a discount is provided before or at the time of supply and is separately mentioned on the invoice, it will not be included in the value of the supply.

Types of Discount and GST Implications:

In the world of trade and commerce, various types of discounts, known by different names, are offered both before and after the time of supply.

The broad categories of discounts observed across industries include:

1. Discounts are given before or at the time of sale, also known as pre-supply discounts, in-bill discounts or trade discounts.
2. Discounts given after the sale are also known as post-supply discounts or off-bill discounts.

After-sale discounts come in various types, such as:

• Cash discount or early payment discount
• Bulk discount or quantity discount
• Turnover discount

Analysis of GST Implications on various Discounts

Pre-supply discounts/ In-bill discounts/Trade discounts:

In common parlance, trade discount generally refers to the discount given at the time of sale of goods or provision of services.

According to section 15(3)(a) of the CGST Act 2017, if a discount is provided before or at the time of sale and is properly documented in the invoice, it is not included in the taxable value. Since GST is levied on the taxable value, there will be no GST applicability on the discount.

Example- Mr. X sold goods worth Rs.10,000 and offered a discount of Rs.1,000 at the time of sale. If this discount is correctly recorded in the invoice, it will not be included in the transaction value and GST will not be applicable on the discount.

Particular	Amount
Sale value	Rs. 10000
Less Discount	Rs. 1000
Transaction value	Rs. 9000

Post-supply discounts/ Off-bill discounts:

These discounts are provided by issuing credit notes after the sale of goods or provision of services. According to Section 15(3)(b) of the CGST Act 2017, if a discount is given after the supply and the following condition is fulfilled, then such discount is not added to the taxable value, and GST is not applicable on that discount.

The condition is as follows:

• Such discount is established through an agreement made at or before the time of such supply, and
• Such discount is established through an agreement made at or before the time of such supply, and
• Based on the documents issued by the supplier, the recipient of the supply is required to reverse the input tax credit related to the discount.

Example- Mr. X sold goods to Mr. Y with an agreement that if Mr. Y purchases goods worth more than Rs 10 lakh between April and June 2024, then Mr. X will allow a discount of 10%. The sales figures for the relevant quarter were received in July 2024, confirming that Mr. Y was eligible for the discount as agreed upon. In this scenario, since the discount terms were agreed upon before the supply and the discount is being provided after the sale, GST will not be applicable on the value of the discount. Consequently, Mr. Y will need to reverse the Input Tax Credit (ITC) attributed to the GST on the discount amount.

GST implication on Cash Discount:

If a cash discount is allowed as a normal trade practice through an agreement made at or before the supply and relevant invoices can be traced, the supplier can deduct it from the transaction value provided that the recipient reverses the relevant Input Tax Credit.

However, if this discount is provided on an ad-hoc basis to prevent bad debts and recover underlying dues, it will not be eligible to be reduced from the transaction value. In this case, this amount will not be considered as a discount.

Seasonal Discount:

Seasonal discounts are offered during the off-season to boost sales of seasonal products. During this period, discounts are provided to clear surplus stock at discounted prices.

Example: Sale of woollen sweaters by clothing retailers at discounted prices during summer.

These discounts are generally given on the invoice value at the time of supply and are eligible for bill discount. However, these can also be given as discount after supply in the form of cash discounts / bulk discounts / turnover discounts etc.

Taxability of seasonal discount:

If a seasonal discount is offered before the sale of goods, GST will not be applicable on it. This is because the value of the discount will be deducted from the supply amount, and it will be clearly recorded on the invoice.
If a seasonal discount is provided after the sale of goods, the applicability of GST depends on whether the conditions of Section 15(3) are satisfied for that specific transaction.

FAQ’s

Q-1: What is the HSN code for discount on sales?
Ans.There is no specific HSN code for discounts on sales. Discounts are not     separately classified under HSN codes. If discounts like Trade discounts, quantity discounts etc. are given before or at the time of the supply, GST will not be applicable on such trade/Quantity discount.

Q-2: What is the SAC code for discount on sales?
Ans.There is no specific SAC code for discounts on sales. Discounts are not separately classified under SAC codes. If discounts like Trade discount, quantity discount etc. are given before or at the time of the supply, GST will not be applicable on such trade/Quantity discount.

Q-3: What is the HSN code for rebate and discount?
Ans. There is no specific HSN code for rebates and discounts. They are not separately classified under HSN codes.

Q-4: Is Input Tax Credit (ITC) available on business promotion expenses?
Ans. Yes, Input Tax Credit (ITC) is available on business promotion expenses if they are incurred in the course or furtherance of business and are not specifically restricted under GST laws.

Q-5: What is the turnover discount?
Ans. Turnover discount refers to the discount given by a supplier to the buyer based on the volume or value of purchases made by the buyer during a specified period.

Q-6: Is post-sale discount applicable under GST?
Ans. Yes, post-sale discounts are applicable under GST if they meet certain conditions as specified under the GST law.

Q-7: What is the transaction value in GST?
Ans. Transaction value is the price actually paid or payable for the supply of goods or services where the supplier and recipient of the supply are not related and the price is the sole consideration for the supply.

Q-8: What is the taxable value in GST?
Ans. Taxable value in GST is the value on which GST is levied. It includes all costs, expenses and taxes incurred by the supplier in relation to the supply of goods or services.

Q-9: What is the value of taxable supply under GST?
Ans. The value of taxable supply under GST is the transaction value of goods or services supplied, excluding taxes and other charges.

Q-10: How to calculate taxable value from the total invoice value?
Ans. Taxable value = Total invoice value - (Discounts + Other charges + Taxes)

Q-11: Is GST applicable on discount received?
Ans. No, GST is not applicable on the discount received by the recipient of goods or services.

Q-12: What is the purchase discount?
Ans. Purchase discount is a reduction in the price of goods or services offered by the seller to the buyer as an incentive for early payment or other reasons.

Q-13: Does MRP include GST?
Ans. Yes, the Maximum Retail Price (MRP) includes all taxes including GST.

Q-14: What is an upfront discount?
Ans. An Upfront discount is a discount given by the supplier to the buyer at the time of purchase.

Q-15: How to reduce GST from the total amount?
Ans. GST can be reduced from the total amount by subtracting the GST amount from the total invoice value.

Q-16: What is the sales discount?
Ans. Sales discount is a reduction in the price of goods or services offered by the seller to the buyer as an incentive for early payment or other reasons.

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