There has been a lot of confusion in treatment of discounts in invoice and questions with respect to which amount should be chargeable to GST. Though the law is pretty clear about it.
GST treats all the discounts such as trade discounts, cash discounts, volume/turnover discounts, etc. Instead, the treatment varies with the timing of discount being given, so we classify the treatment of discounts under the following two categories:
1. Discount given before or at the time of supply, and
2. Discount given after the supply has been effected.
Now, let’s discuss each one of the above with practical aspects
1.Discount given before or at the time of supply
The treatment is simple, the discounts given before or at the time of supply are simply deducted from the invoice value i.e. GST would be charges on discounted value
Suppose, the sale value is Rs.1000 and you provide a discount of 10%. So, while issuing the tax invoice, you would specify the price of the goods or services as Rs.1000 and deduct discount of Rs.100 showing it in the invoice, which makes the taxable value to be Rs.900. Now, GST would be applied on Rs.900 i.e. the discounted value. Suppose the rate of GST is 12%, so the amount of GST would be 900 x 12% = Rs.108
2. Discount given after the supply has been effected
These discounts are generally of the nature of periodical turnover/volume discounts or incentives, allowed for buying a particular value of goods/services during a period.
Such discounts will be allowed as deduction from the value of supply only if the following conditions are satisfied:
- There must be written contract between the supplier and the buyer, prior to making the supply, which should mention the amount of discount to be given.
- Such discount must be able to be mapped to the relevant invoices against which such discount is being given.
- Buyer must have reversed the Input Tax Credit pertaining to the discount he is now receiving.
Let’s understand this with the example we used earlier, if the discount of Rs.100 is being allowed after the sale has been effected, on satisfying the conditions as mentioned above, the seller can raise a credit note for the amount of discount along with the GST thereon, and the buyer will raise a corresponding debit note. This way, the supplier’s value of the supplies for the month will be reduced by Rs.100 for that month and consequentially he will not be paying GST on the discount.
However, we should check if the conditions are met:
- There is an agreement in existence prior to making the sale
- Discount can be mapped to invoices to which it pertains
- Buyer has reversed the ITC with respect to this Rs.100, in case he has claimed ITC on the whole amount of Rs.1000