DISCOUNT AND ITS TREATMENT

UNDER GST LAW

CMA Susanta Kumar Saha
GST Consultant

The word discount hasn’t been

defined in GST law. Cambridge
dictionary defines the word
‘discount’ to mean as “a
reduction in the usual price”,
whereas as per Collins
dictionary the word ‘discount’
to mean as “a reduction in the
usual price of something”.

It is a common practice for the

companies to give discounts of
different types, from time to
time, to survive in the
competitive market. In this
article, I will discuss about the
treatment of discount in GST
law.

Relevant statutory provision for value of taxable supply in case of a discount:

Section 15(3) of the CGST Act, 2017 (similar provision exits in SGST/UTGST Act, 2017) stipulates that the
value of the supply shall not include any discount subject to the following conditions:

Different type of discounts, may be categorised broadly under two types. Let’s say, case - I, type of discounts
which are given before or at the time of supply and are recorded in the invoice at the time of supply, and
case – II, type of discounts which are given after the sale has been effected.

A. Case I (illustrative):
a. trade discount at the time of supply;
b. special discount for making full payment in advance;

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 c. bulk purchase discount, say, additional discount of 5% on purchase worth of Rs. 20,000/- or more;
d. get 10% discount on purchase worth of Rs. 25,000/- and above, 15% discount on purchase worth of
Rs. 40,000/- and above;
e. buy six plates made of steel, get a set of two bowl made of steel free;
f. buy two pastes of 100 gm each and get one tooth brush free;
g. buy three shirts and get one shirt free;
h. buy 10 cartoons of biscuits and get 100 ml of one coconut oil bottle free;

A close examination of the nature of discounts, position with respect to the claim of ITC on such
discussed supra, reveals that such type of items?
discounts were prevailing and were brought to
the knowledge of the recipients (customers) at Section 7 of the CGST Act, 2017 (similar provision
the time of supply. Few discounts as stated above, exists in SGST/UTGST Act, 2017) stipulates
might even been declared on the spot before sales ‘supply’ to include all forms of supply of goods
took place. The mode of communication in this or services or both such as sale, transfer, barter,
case, may even be verbal as we see similar type of exchange, licence, rental, lease or disposal made
spot discounts in shopping malls. As discount or agreed to be made for a consideration by a
offered in all the supplies, discussed supra, satisfy person in the course or furtherance of business.
the condition as stipulated in section 15(3)(a) of
the CGST Act, 2017 (similar provision exists in 100 ml coconut oil bottle being supplied here
SGST/UTGST Act, 2017), value of supply shall with 10 cartoons of biscuits and one tooth brush
not include such discounts and outward tax being supplied here with two pastes of 100 gm
liability on such supplies will accordingly be each are certainly for consideration, and not
calculated. gratuitous. Supply of one 100 ml coconut oil
bottle and one tooth brush are not independent
On a plain reading of the examples given in sl. no but conditional to purchase of biscuits of specified
A(e) to A(h) above, one may get tempted to quantity and two pastes of 100 gm each
conclude that input tax credit (ITC) may not be respectively. Supply of 100 ml of coconut oil
available on the items which might appear to have bottle is connected to supply of biscuits which is
given free. being manufactured by the company and similarly
supply of tooth brush is also connected to supply
In the case of examples given in point no. A(e) and of paste, both of which are being manufactured by
A(g), there is no free issue of goods, rather six the company. Therefore, supply of 100 ml
plates and two bowls are supplied at a price of six coconut oil bottle and tooth brush are clearly
plates and likewise four shirts are supplied at the in the course or furtherance of business.
price of three shirts. These type of discounts may
be termed as quantity discounts for furtherance Having understood that both the supplies are in
of sales. As the supply is made in the course or the course or furtherance of business, let us
furtherance of sale, there shall be no denial of ITC. understand their nature of supply, i.e, whether
they are composite supply or mixed supply.
Now let us assume that in case of example given
in point no. A(f), the company offering such Section 2(30) of the CGST Act, 2017 (similar
discount scheme, manufactures both the products provision exists in SGST/UTGST Act, 2017)
and in case of example given in point no. A(h), the stipulates “composite supply” to mean a supply
company offering such discount scheme, made by a taxable person to a recipient consisting
manufactures biscuits only and has bought 100 ml of two or more taxable supplies of goods or
bottles of coconut oil from the market. We will services or both, or any combination thereof,
also examine whether the company can claim the which are naturally bundled and supplied in
benefits of input tax credit (ITC). conjunction with each other in the ordinary
course of business, one of which is a principal
Again in case of point A(f), the manufacturer supply.
offers two pastes of 100 gm each and one tooth
brush at the cost of two pastes only. Similarly, in Section 2(90) of the CGST Act, 2017 (similar
case of point A(h), the company offers 10 provision exists in SGST/UTGST Act, 2017)
cartoons of biscuits and 100 ml of one coconut oil stipulates “principal supply” to mean the supply
bottle at the cost of 10 cartoons of biscuits. of goods or services which constitutes the
predominant element of a composite supply
Let us analyse whether the free items can and to which any other supply forming part of
constitute as supplies. If so, what would be the that composite supply is ancillary.

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Section 2(74) of the CGST Act, 2017 (similar both to him which are used or intended to be used
provision exists in SGST/UTGST Act, 2017) in the course or furtherance of his business
stipulates “mixed supply” to mean two or more and the said amount shall be credited to the
individual supplies of goods or services, or any electronic credit ledger of such person.
combination thereof, made in conjunction with
each other by a taxable person for a single price Since, coconut oil and tooth brush are been
where such supply does not constitute a supplied here in the course or furtherance of
composite supply. business, ITC can be claimed according to my
considered view. As supply of these items are
In these cases, predominant supplies are conditional and are neither supplied as free nor as
obviously supply of biscuits and supply of tooth gift (gratuitous supply), credit of input tax are not
pastes and not coconut oil and tooth brush blocked under section 17(5) of the CGST Act,
respectively according to my considered view. 2017 according to my considered view.
Furthermore, coconut oil and tooth brush are
offered as complementary items on purchase of There may be an argument that clause 1 of
biscuits and tooth paste respectively. Therefore, Schedule I states that permanent transfer or
supply of coconut oil is ancillary to biscuits and disposal of business assets where input tax credit
similarly supply of tooth brush is ancillary to has been availed on such assets shall be treated as
tooth paste. Thus the argument that the biscuit supply even without consideration. As there is no
and coconut oil are two independent supplies and consideration for the said free quantities (tooth
are artificially bundled, may not be tenable brush or 100 ml bottle of coconut oil), one may
according to my considered view. further argue that valuation rules may have to
be referred, to determine the value of free supply
Coconut oil and tooth brush are not the principal as per Section 15(4) of the said act.
supplies but biscuits and tooth paste are only
principal supplies respectively in the above However, this argument may not be tenable at all
examples, both the supplies are to be considered as the free products (tooth brush or 100 ml bottle
as composite supplies and not mixed supplies of coconut oil) are available to the recipients only
according to my considered view. upon fulfilment of conditions specified therein,
stated above, whereas the clause 1 of Schedule I
Section 16(1) of the CGST Act, 2017 (similar refers to those cases where the business asset
provision exists in SGST/UTGST Act, 2017) has been transferred solo and in individual
stipulates that every registered person shall, capacity i.e. transfer of which is not dependent on
subject to such conditions and restrictions as may any other supply, and is absolutely without
be prescribed and in the manner specified in consideration. Thus, on both the counts, this
section 49, be entitled to take credit of input argument will not be tenable according to my
tax charged on any supply of goods or services or considered view
.

B. Case II (illustrative):
a. additional discount of 2% (say), on payment being made within 10 days from the date of invoice;
b. additional discount of 3% (say) for lifting of 10,000 cartoons of 100 ml coconut oil bottle during a
specified period;
c. special discount of 2% (say), for meeting the yearly purchase target by a recipient (distributers,
dealers etc)

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The matter whether the value of supply will exclude the value of post-sale discounts, will be governed by the
provision of clause (b) of sub-section (3) of section 15 of the CGST Act, 2017 which is reproduced below:

“(3) The value of the supply shall not include any discount which is given–
(a) ……………………….
(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 (ITC) 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 perusal of the above, it is evident that post sale discount, shall not form part of the value of supply
only if it satisfies the following conditions:

 there exists an agreement for discount which was entered into between the parties either at or
before the supply took place;
 the supply was made in accordance with such agreement and must not for any other supplies;
 such discount must be specifically linked with invoices vide which supply was made under the
agreement;
 ITC attributable to such discounts have been duly reversed by the recipient(s).

Thus it may be concluded that prior and proper documentation holds the key for the purpose of excluding
discount from the value of supply. Without going into the legal interpretation of the word ‘agreement’, it is
desirable to have written agreement in place to establish the claim.

What could happen to valuation if the proper and prior agreement could not be established?

Assume there was an agreement which states (say) “the distributers will be eligible for a trip to Manali on
lifting of 10,000 cartoons of coconut oil of 100 ml each during the quarter January to March”. Upon being
eligible for the trip, by a distributor, based on the criteria as per the agreement, the company, let’s say, has
issued a credit note with tax (GST) for a lump sum amount of, Rs. 25,000/- plus taxes (say ) at applicable rate.

The agreement didn’t have an option to choose between a trip to Manali or a cash amount, in lieu of Manali
trip. The basis on which the company has evaluated the cost of Manali trip equivalent to Rs. 25,000/- cannot
be established as no trip details were laid down in the agreement, viz, trip to Manali by flight for two nights
three days with a stay in a 5 star hotel or something of similar line. Thus the nexus, i,e, the discount was
offered in accordance with a pre-existed agreement has been made, will be very difficult to established in this
case and therefore the value of discount may not be excluded from the value of supply according to my
considered view.

Now let us look at another type of discount, i,e, employee discount:

Let’s assume, a retail store who sells different type of

clothing, apparels etc has a policy of giving 10%
discount in addition to prevailing promotional
schemes. Even if no such scheme is available for the
time being, the employee will be entitled to 10%
discount. Whether the discount will be excluded from
the value of supply for the purpose of payment of tax
(GST) by the company?

Explanation to section 15 of the CGST Act, 2017

states that employer and employee shall be deemed
to be “related persons”. Rule 28 of the CGST Rules,
2017 stipulates that value of supply of goods or
services or both between related persons, other than
through an agent, would be the open market value of
such supply. Thus, the employer would be failing in
discharging proper tax liability if tax (GST) has been
calculated on a value net off discount at the rate of 10%.

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C. Financial transactions are reportable under GST law in prescribed form, disclosure of such credit notes
issued towards post sale discounts in Form GSTR-1 / Form GSTR-3B / Form GSTR-9 / Form GSTR-9C
will be as stated below:

a. Form GSTR-3B: discounts which have met the conditions as stipulated under section 15(3)(b),
will be netted off against taxable value and tax amount under table no. 3.1(a);
b. Form GSTR-1:
i. in case of B2CS: to be shown in Table 7 after reducing from taxable value and tax amount; and
ii. in case of B2B: to be shown in Table 9B as a separate document.
c. Form GSTR-9:
i. invoice and credit note, both, pertains to the same financial year, say for an example, July,
2017 to March, 2018:
 in case of B2C transaction, reduce the taxable value and tax, to be shown in table 4A;
 in case of B2B transaction, the value of CN is to be shown separately in Table 4I;
ii. invoice relates to the period (say), July, 2017 to March, 2018 and credit note was issued
during the period April, 2018 to March, 2019;
 in case of B2B and B2C, both, value of credit note is to be netted off from invoice raised
and to be shown in table 11;
d. Form GSTR-9C:
i. if credit note has been issued post 31st March, 2018 (in this case), to be shown in table 5E;
ii. if credit note has not issued as per GST law, but has been accounted for in the financial
statement, to be shown in table 5J.

D. The Government of India, Ministry of Finance, Department of Revenue, CBIC, GST Policy Wing, exercising
its powers conferred under section 168(1) of the CGST Act, 2017, has issued clarification on various
doubts related to treatment of sales promotion schemes under GST vide Circular No. 92/11/2019-GST
dated 7th March, 2019. A brief synopsis is given below:

a. Free samples and gifts:

 samples are given without consideration, such as, pharmaceutical companies often provide drug
samples to stockists, dealers, medical practitioners;
 goods or services or both which are supplied at free of cost (without any consideration) shall
not be treated as ‘supply’ except in case of activities mentioned in Schedule I of the Act;
 further section 17(5)(h) stipulates, ITC shall not be available to the supplier on the inputs, input
services and capital goods to the extent they are used in relation to the gifts or free samples
distributed without any consideration;
 under such circumstances, such supply will not be considered as ‘supply’ as per the GST law and
input tax credit (ITC) shall not be available to the supplier.

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 b. Buy one and get one free offer:

We have discussed the scenario with similar examples as mentioned in point no A(e), A(f) or A(g)
and thus the same points have not been repeated here again.

c. Discounts including ‘Buy more, save more’ offers:

We have discussed the scenario with similar examples as mentioned in point no B(b) or B(c) and
thus the same points have not been repeated here again..

d. Secondary Discounts:

Matter related to secondary discounts has been more elaborately clarified vide Circular No.
105/24/2019-GST dated 28th June, 2019, described below in brief through a diagram:

Post Sale Discount Post Sale Discount

without any obligation to an with an obligation to carry

additional activity by the some activity, like
recipient advertisement, exhibition,
sales drive etc

will be related to original considered, separate supply

supply, not included in the of service, for recipient,
value of supply , in the hands (dealer), and GST would be
of the supplier paid on discount

e. Financial / Commercial Credit Note:

It has been clarified that financial or commercial credit note can be issued when the conditions laid
down in clause (b) of sub-section (3) of section 15 of the CGST Act, 2017 are not satisfied.
However, secondary discounts shall not be excluded while determining the value of supply by the
supplier and there shall be no impact on availability or otherwise of ITC in the hands of supplier.

Disclaimer:

The publications contain information solely for informational purpose. It is not a guidance note and does not constitute any
professional advice at all. The author does not accept any responsibility for any loss or damage of any kind arising out of any
information in this article or for any actions taken in reliance thereon.

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