Whether discount is included in value of supply?
To clear doubts regarding discounts included in the value of supply, we need to understand section 15, sub section 3 of the CGST Act in order to conclude whether discounts form part of the value of supply or not. Section 15 tells us about the value of taxable supply of good or services, whereas section 15(3) cover the discount part under value of supply.
Section 15(3) says the following:
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 above section clears that supply shall not include any kind of discount. Point (a) says that any discount which is shown in the invoice provided before or at the time of supply shall not form part of the value of supply.
Example for point (a), A supplier supply goods of Rs.100/- to Buyer B with a discount of Rs. 5, invoice which A issues show amount Rs. 100 less discount separately. Therefore, in this case, the value of taxable supply is Rs.95 and GST shall be charged on Rs. 95/- and not on 100/-.
Explanation of Section 15(3)(b)(i) and 15(3)(b)(ii)
Example: A and B entered in an agreement of supply. There is a condition in an agreement that says that a discount of Rs. 10 per kg shall be given if B purchases more than 100 kg in two months. B purchases more than 100 kg in two months hence he is eligible for a discount of Rs.1000, but here supply is already made to B, we have to consider two points over here: -
- B will get a discount of Rs.1000 from A as per the agreement and this is also linked with the relevant invoice.
- Since supply is already made and the discount is only eligible after a specific period, that means A has charged more taxable value, therefore he shall issue a credit note and recipient B shall reverse the Input tax credit taken earlier (no input tax credit for discount).
In addition to the above, there are also cases where discounts are offered after supply is made:
An example where A supplies goods at the rate 100 to B, after that A revalue the amount to Rs. 90. So, what is to be done in this case, whether credit note to be issued, also whether a discount will be excluded from the value of taxable supply or not. So, this is clarified in Circular No. 92/11/2019-GST under secondary discounts, it is hereby clarified that financial/commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.
It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.