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The GST Law 2017 has taken the country by storm. No doubt, this is definitely quite a good move and has had quite a favourable response from the masses. GST was implemented as a curative measure of the complex indirect tax structure of India and as a measure of making indirect tax structure of India parallel to the global developments and tax structure of developed countries. However, we simply cannot deny the fact that there are some challenges which are associated with its desired implementation. Due to the presence of multidimensional business houses in India, one of the most tortuous and prone to litigation area in future is availment and utilisation of Input Tax Credit. This article intends to confer upon the Input tax credit in case of Post Facto Discount. Post facto discount is a discount which is being agreed to be given after the supply has been effected, few examples of such discounts are Turnover discount / Special Incentive discount / Bonus Incentive / Target Incentive / Performance Discount. As the post facto discount is provided after the supply has been effected, hence, it passes only through credit notes issued by the supplier to the recipient. However, under GST regime valuation provisions restrict all the discount to be deducted from the value of supply. Thus, this article underscore the issues which might arise pertaining to input tax credit in case the valuation mechanism under GST does not allow discount to be deducted from the value of supply.

Analysis of Legislation

The valuation of Supply comes within the ambit of Section 15 of the Central Goods and Service tax Act. At the inception of discussion, it is requisite here to peruse the provisions of section 15(3)(b) which deals with the post facto discount, which are reiterated for sake of your reference-

Section 15(3)-
The value of the supply shall not include any discount which is given -

(b) after the supply has been affected, 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 bare perusal of above it can be inferred that discount which is given after the supply shall not form part of the transaction value if the below mentioned conditions are complied with-

1. The discount is established in terms of the agreement entered into at or before the time of supply.
2. Discount is linked to a specific supply invoice.
3. ITC attributable to the discount is required to be reversed by the buyer or recipient of the supply.

Hence, the intent or commercial arrangement between the supplier and buyer would decide whether the discount in relation to any supply could reduce the GST liability of the supplier to the extent of such discount. If post supply discounts were not anticipated at the time of supply, it is not allowed to be deducted from value.

However, it is imperative to note that in the various complex business structures operational in India there may arise instances in which the value of discount is either contingent (not established in terms of the agreement) or discount is not linked to specific supply invoices.

At this juncture, another discussion which emanate that discount post GST regime can be segregated in two stripes-

  • Discount which is excluded while computing the Value of supply.
  • Discount which is not excluded while computing the value of supply

The above set of circumstances can be elaborated with an example-

Telco Mobiles (hereinafter referred as “Supplier”) is a mobile manufacturing company. The company channelize its products through distributors and dealers. As a regular trade practice and policy of the company and industry in general, the supplier grants Turnover discount/Special Incentive discount/Bonus Incentive/Target Incentive/Performance Discount to the distributors and dealers by way of separate scheme letters for each week or month on special occasions like Diwali or Christmas, etc. However, the Bonus Incentive/ Target Incentive cannot be linked to a specific supply invoices and whether Special Incentive Discount/Performance discount is to be given or not, to which distributor it is to be given, what value of discount, it all depends on the discretion of management and its valuation mechanism has not been specified in the agreement entered into with distributors and dealers. Thus, only the Turnover discount can be linked to specific supply invoices and valuation mechanism of the same is specified in the agreement entered into with distributors and dealers.

Now Suppose the supplier sold its Mobiles worth Rs.1,00,00,000 to Techno Guide (hereinafter referred as “recipient”). IGST charged thereon is Rs.12,00,000 of which the input tax credit has been availed by the Distributor. Now, the discount for which the recipient was eligible in accordance with agreements and management’s decision is as under-

  • Turnover discount-Rs.1,00,000
  • Special Incentive discount-Rs.2,00,000
  • Bonus Incentive-Rs.3,00,000
  • Target Incentive-Rs.1,50,000
  • Performance Discount-Rs.2,50,000

On the basis of percipient perusal of above discussion, we can conclude that the discount which is eligible for exclusion from value of supply is turnover discount, hence Credit note in GST can be issued only in respect of turnover discount i.e., Rs.1,00,000 and IGST of Rs.12,000 thereon. Thus, for the remaining value of the discount, the commercial credit note will be issued for Rs.9,00,000. Thus, the amount which is finally paid by the distributor to the supplier including the GST is Rs.10,188,000. However, the value of supply in accordance with provisions of Section 15 of the Act in the instant case is Rs.99,00,000/-. Furthermore, the Amount of ITC which has been availed by the recipient in relation to the above transaction netting the credit note is Rs.11,88,000/-.

At this juncture, it is indispensable to confer about section proviso to section 16(2), that deals with ineligibility of input tax credit in certain cases, same is reiterated for sake of your reference-

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

The second proviso to sub-section (2) of Section 16 (highlighted above) links the availability of ITC with the payment duration in respect of the supply of goods or services between the vendor and the customer. The proviso aims to restrict the input tax credit of inward supplies received by a taxpayer if the value of such inward supplies along with tax is not made to the vendor within a period of 180 days from the date of the invoice. This move, which is reminiscent of Rule 4(7) of the CENVAT Credit Rules, 2004, can be assumed to be inserted to safeguard the interest of the vendor by ensuring that he receives payment from the customer within 180 days. However, it is imperative to note here that the value of supply has been defined under section 15 of the Central goods and Service tax Act.

Now, the question that arises is that “the failure to pay value of supply” mentioned in proviso has not been addressed anywhere in the GST legislation, however, in a recently a conclusion on the similar facts has been adopted by the Advance Ruling Authority of Tamil Nadu (“ARA”) in the case of M/s MRF Limited (Order No.5/AAR/2019 Dated 22.01.2019). The ARA adopted a view that what should be paid by a recipient to the supplier is the “Value of supply as defined under section 15” and the issuance of commercial credit note will not be construed as payment being made in respect of Value of supply.

Now, Applying the above-discussed rationale adopted by the ARA to the instant case of the recipient (Techno guide), it is judicious to note that Value of supply in accordance with provisions of section 15 is Rs 99,00,000 and tax thereon is Rs. 11,88,000. Hence in accordance with interpretation adopted by ARA of proviso to section 16(2), the amount which should be paid to the supplier by the recipient is Rs.11,088,000/-. However, due to issuance of commercial credit note, the amount which is paid by the recipient is Rs.10,188,000. Hence, there emerges an issue in relation to ITC on the value of commercial credit Note that is of Rs.9,00,000. As the whole value of supply has not been paid to the supplier, the recipient becomes ineligible in respect of credit of Rs. 1,08,000 which relates to commercial credit notes on account of provisions of proviso to section 16(2) as discussed above. The same conclusion has been adopted by the Advance Ruling Authority of Tamil Nadu in the case of M/s MRF Limited (Order No.5/AAR/2019 Dated 22.01.2019).

However, on the contrast to above another view which might come into picture is that the commercial credit Note in the instant case is equivalent to the payment made in respect of such value of supply, as this is just a mutually agreed payment settlement mechanism, thus, even when commercial credit note is issued, it results in the settlement of the consideration in respect of such supply, thereby not requiring the recipient to reverse the Input Tax credit. However such view is litigative and not conclusive but supports the commercial understanding of the parties since there is no failure on the part of the recipient to pay the consideration.


On the conjoined perusal of the above discussion, it can be concluded, despite considerations of the various litigation in the previous regime while framing the GST regime, there still persist various disputes in relation various issues. The above discussion is one of the area, which might emerge in the future. Hence, it is advisable to all the channel partners of such an arrangement to take caution while framing the agreements, so that they can be saved in case of any future conflicts.

DISCLAIMER: The entire contents of this document have been developed on the basis of relevant statutory provisions and as per the information existing at the time of the preparation. Though the authors have made utmost efforts to provide authentic information however, the material contained in this document does not constitute/substitute professional advice that may be required before acting on any matter. The authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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