For any business to flourish, the taxpayers have to
offer various promotions like trade discounts, turnover discounts, free goods,
offers, etc.. All these are required for the organizations to capture the
market share, attract new customers, and increase profits. All these are the
business requirements, but at the same time, the taxpayers also have to ensure
that they are following all the provisions of the law and changes in the law
from time to time. Another important aspect is that GST is a business process
reform and not tax reform. This has been proved time and again from the various
orders passed by the Honourable High Courts and the orders passed by the
Advance Ruling benches and the National Authority for Anti-profiteering.
The additional amount offered by the taxpayer in
whatever name it is are covered under Section 15 of the CGST Act 2017 and wide
Rules 27 to 35 of the CGST Rule 2017.
In any business, there will be two types of
discounts, offers, schemes, or by whatever name we call it. The first one is
known at the Time of Supply, and the second is given Post Supply. The
provisions of the law are very clear in case of discounts, schemes or by
whatever name given at or during the Time of Supply. The provisions related to
this are given in Section 15(1) of the CGST Act
Section 15 (1) The value of a supply of goods or
services or both shall be the transaction value, which is the price actually
paid or payable for the said supply of goods or services or both where the
supplier and the recipient of the supply are not related and the price is the
sole consideration for the supply.
(2) The value of supply shall include–––
(a) any taxes, duties, cesses, fees and charges
levied under any law for the time being in force other than this Act, the State
Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and
the Goods and Services Tax (Compensation to States) Act, if charged separately
by the supplier;
(b) any amount that the supplier is liable to pay in
relation to such supply but which has been incurred by the recipient of the
supply and not included in the price actually paid or payable for the goods or
services or both;
(c) incidental expenses, including commission and
packing, charged by the supplier to the recipient of a supply and any amount
charged for anything done by the supplier in respect of the supply of goods or
services or both at the time of, or before delivery of goods or supply of
(d) interest or late fee or penalty for delayed
payment of any consideration for any supply; and
(e) subsidies directly linked to the price excluding
subsidies provided by the Central Government and State Governments.
Explanation. –– For the purposes of this
sub-section, the amount of subsidy shall be included in the value of supply of
the supplier who receives the subsidy.
or offer is not defined in the GST Act and for this we have to refer to the Corpus
Juris Secundum, vol 26A page 974 as follows
term trade discount means the difference between the seller list price and the
price at which he actually sells goods to the trade a percentage deduction from
the regular list or catalogue price of goods."
Say, for example, if the retailer or distributor
gives a discount of 10% on the goods or services sold, then on the tax invoice,
the amount of discount given is shown, and the customer pays the net amount of
discount as it will be transaction value and on this only GST will be
Offer / Free
In normal life, we come across terms like Buy 2 and
get 1 free. In this case, the buyer has to pay for the two numbers, and then
only the third one is given as free. This means there is nothing free as the
buyer has to pay for the two units, and the third one is given as free then
only, which means that the taxpayer will issue an invoice for three units and
charge the price for two units only. In this case, the taxpayer can have an
option of showing the number of units is three and charge the amount for two.
GST will be computed on the price of two items, and the inventory also will be
updated for three units.
Alternatively, the taxpayer can show two lines, one
line item for two units and the third with one unit, and prices for the first
will be shown for two units, and for the second line, the price can be shown as
It is for the taxpayers to adopt whatever they want
or any other method to show it on the tax invoice, and there is no need to
reverse the input tax credit in case of the third item as there is
consideration received, and then only the third unit is given free.
The above will be covered as part of the discount/offers
/ free or by whatever name called as pre-shipment discounts, and the taxpayer
will be charging taxes only the transaction value as it is known at the time of
supply and recorded on the tax invoice.
Post Supply Discounts
Post supply discounts can be in the form of turnover
discounts, or reimbursement of expenses incurred by the agent on behalf of the
principal, or trade discount or free trip to different locations within India
or outside India or any time given as gifts on the achievement of
pre-determined turnover or by whatever name it is called has a different
treatment under GST.
The provisions for such treatment are given in
Section 15(3) of the CGST Act 2017.
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
(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 document issued by the supplier has been reversed by
the recipient of the supply
From the above provisions, it is clear that any
discount given post supply should be documented and mentioned on the agreement
or the tax invoice. If any such details are not there, then any such discounts
given will not be considered in the value of supply, and for such a discount,
there will be any impact of GST, and it will be a normal financial credit note
only, and the tax will not be reversed.
If any discount or any reimbursement passed
subsequently and not documents will not have any GST impact, and the same is
echoed in the order issued by the AAR of Maharashtra in the case of M/s
UltraTech Cement Ltd.
Facts of the Case
M/s UltraTech Cement Ltd. Is a registered taxpayer
under GST and is in the business of manufacturing and supply of Cement.
The applicants enter into an agreement the authorized
dealers/stockists for the supply of goods on a principal-to-principal basis.
The dealer/stockists are supplied cement at a
As cement pricing is dynamic, sometimes the
dealer/stockist sells the same below his purchase price as the industry practice
because the principal will reimburse the same as a Trade discount.
The agreement entered has a clause that says the
price difference will be reimbursed as a trade discount.
The bench, in its ruling, has stated the following
The wordings of
Section 15 (3) (b) (i) very clearly states that quantum of discount is given
after the supply of goods has taken place has to be there in the terms of such
agreement i.e. it cannot be open ended not based on any criteria. Thus this
discount quantum cannot be arrived at without any basis only at the discretion
of the supplier. The supplier has to clearly mention the quantum of discount or
percentage of discount which is to be worked out on the basis of certain
parameters or certain criteria which may be agreed to between the supplier and
the recipient and which are predetermined and mentioned in agreement in respect
of supply of the goods.
the Applicant's agreement with authorized stockists, the company will pay
discount at such rate as may be decided by the company from time to time on the
quantity sold to the authorized stockists in a particular month. But there is
no basis or criteria or parameter (which may even be of personal relations
nature between the parties to the agreement) mentioned in the agreement on the
basis of which the quantum of discount to be given on the goods which have
already been supplied is mentioned.
Hence the amount paid to the Dealer towards "rate difference" and "special discount" as mentioned above, post supply do NOT comply with the requirements of section 15(3)(b)(i) of the CGST Act and therefore cannot be considered and allowed as discount for the purpose of arriving at the 'transaction value' in terms of Section 15 of the CGST Act.
The bench has also ruled that the trade discount
given cannot be considered as the transaction value
Whether the amount paid to authorized dealers
towards "rate difference" after effecting the supply of goods by the
applicant to aforesaid dealers can be considered for the purpose of arriving at
the 'transaction value' in terms of Section 15 of the CGST Act. Answered
in the Negative
Whether the amount paid to authorized dealers towards "rate difference" after effecting the supply of goods would be allowed under Section 15(1) read with Section 34(1) of the CGST Act or under Section 15(3) read with Section 34(1) ibid. Answered in the Negative
If the terms of the contract clearly state that the
distributor or dealer or by any other name called, the same is to be considered
for the payment of GST.
Facts of the Case
The applicant M/s Santhosh Distributors is an
authorized distributor for M/s. Castrol India Ltd, Mumbai.
The applicant uses the software provided for the
The applicant does not have any control over the
pricing to be provided to its customers, M/s Castrol India Ltd determines the
In view of this, the applicant has the following
i. On the tax
liability of the applicant for the transactions mentioned herein and explained
as above. The petitioner is paying the tax due as per the invoice value issued
by the applicant and availing the input credit of GST shown in the inward
invoice received by the applicant from the Principal Company or their stockist.
The applicant/distributor is eligible to avail ITC shown in the inward invoice received by him from the supplier of goods / principal company.
ii. Whether the discount provided by the Principal Company to their dealers through the applicant as shown in Annexure D attracts any tax under the GST laws.
It is established from the statement of the
applicant that the prices of the products supplied by the applicant is
determined by the supplier /principal company and the applicant has no control
on the price of the products. Therefore, it is evident that the additional
discount given by the supplier through the applicant; which is reimbursed to
the applicant is to offer a special reduced price by the distributor /
applicant to the customers and hence the amount represent consideration paid by
the supplier of goods / principal company to the distributor / applicant for
supply of goods by the distributor / applicant to the customer. Therefore, this
additional discount reimbursed by the supplier of goods / principal company to
the distributor / applicant is liable to be added to the consideration payable
by the customer to the distributor / applicant to arrive at the value of supply
under Section 15 of the CGST / SGST Act at the hands of the distributor /
iii. Whether the
amount shown in the Commercial Credit note issued to the applicant by the
Principal Company attracts proportionate reversal of input tax credit.
The supplier of goods / principal company issuing the commercial credit note is not eligible to reduce his original tax liability and hence the recipient / applicant will not be liable to reverse the ITC attributable to the commercial credit notes received by him from the supplier
iv. Is there any tax liability under GST laws on the applicant for the amount received as reimbursement of discount or rebate provided by the Principal Company as per written agreement between the Principal Company and their dealers and also an agreement between the principal and distributors.
The applicant is liable to pay GST at the applicable
rate on the amount received as reimbursement of discount / rebate from the
From the above orders, it is clear that if the
discount is mentioned clearly, then the credit note issued will attract GST and
the recipient has to reverse the input tax credit accordingly.
In the case of the FMCG companies, the distributors
or dealers are given as free gifts on reaching pre-determined turnover. If such
gift details are given in the agreement or documented on the agreement or tax
invoice, the supplier needs to reverse the input tax credit on such free goods
as specified under Section 17(5)(h) of the CGST Act 2017.
goods lost, stolen, destroyed, written off or
disposed of by way of gift or free samples; and
When purchasing the gifts to the dealers or
distributors or by whatever name they are called, if the supplier avails the
input tax credit, then the same need not be reversed. The free gifts can be
given in the form of Gold Coins or
consumer durables or laptop, or any other item.
Similarly, there will be cases where the supplier
will be offering all paid trips to different destinations in India or abroad to
dealers or distributors or by whatever name they are called, if they achieve a
pre-determined turnover or who achieves the highest turnover. In such cases, if
the same is documented and known at the time of supply, in such cases all the
expense which is incurred for the trip, the input tax credit is eligible. As
per the provisions of the CGST Act, the input tax credit can be availed on all
inputs and input services if used in the course or furtherance of business. The
sponsored trips are part of the furtherance or in the course of business, and
they are eligible to take the input tax credit.
As per the provisions of the CGST Act, orders passed
by the Authority for Advance Ruling at the state level are applicable to the
applicant and the office only. From the orders passed by the AAR, the
jurisprudence can be taken, and the interpretation and the intent of the law
can be observed. The basis on that, if required, the taxpayers have to change
their business process wherever possible to avoid litigations. The provisions
of the law are clear, and if there are implemented in the true spirit,
there will not be any legal issues for the taxpayers, and can do their business
without any hassles. Some of the provisions of the GST should not be compared
with the erstwhile provisions of Central Excise or Service Tax or VAT. As it is
a new law, there will be some gaps or amendments are required in the provisions
based on the judgments passed by the Honourable Supreme Court of India.
Treatment of discounts post supply is a concern for many of the taxpayers. If
the same are interpreted accordingly, and the business process are modified to
meet the provisions of the law, then the taxpayers can spend their valuable
time on business improvement.
Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions, or organizations that the author may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.