Discount issue being complex & contentious in nature, comprehensive analysis has been carried out in this article to assist the taxpayers in taking informed decision. In this article, we will have multifaceted discussion surrounding Valuation, Supply of Service and Reversibility of ITC with the help of multiple case scenarios related to Discount being given both at the time of supply and after the supply. Accordingly, discussion is being presented in two Parts as follows:
PART A: Legal Provisions regarding Value and ITC
Value of Supply in case of discount as defined in Section 15(3)
......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 document issued by the supplier has been reversed by the recipient of the supply.
As per Section 15(3)(a), in case discount is given at the time of supply and duly recorded in the Invoice, Value of Goods/Services will be net off discount.
Further as per Section 15(3)(b), even if discount is given after supply but it fulfils both conditions as prescribed above, the discount will be reduced from the value of Supply.
Second & Third Proviso to Section 16(2)
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 paid by him along with interest payable under section 50, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
Reversal of input tax credit in the case of non-payment of consideration.-
(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply whether wholly or partly along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay or reverse an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:
As per above provisions of Law, it is important to note that for availing full ITC, Dealer/Recipient should not fail to pay to its supplier the Value of Goods along with GST payable thereon.
In this PART, different scenarios of discounts along with their Tax Treatment under GST Law are being discussed. For moving discussion forward, let’s take One Common Illustration
Price Payable for Supply before Discount (excluding GST): Rs. 100
Discount: Rs. 10
Net Price Payable for Supply after Discount: Rs. 90
Multiple Scenarios of Discounts
1) Discount on the Invoice:
In this case which is simplest of all, as discount is being given at the time of supply and duly recorded on Invoice, as per Section 15(3)(a), Value of Supply will be Rs. 90. Accordingly, Supplier/manufacturer would be required to discharge GST on Rs. 90 and Recipient/Dealer would be eligible for ITC on the value of Rs. 90.
2) Post- Sales Discounts given after Supply when calculation of discount is linked to Invoices like Volume Discounts, Bulk Discounts, Cash Discount etc.
a) Discount is being given in terms of Section 15(3)(b): When Post-Sales Discount is being given by the supplier in terms of Section 15(3)(b) i.e. where such discount is being given in terms of agreement entered at the time of supply and Recipient has reversed the ITC, in that case also Value of Supply will be reduced to Rs. 90.
However, interesting point is how value will be reduced as originally at the time of Supply, GST has already been discharged on the value of Rs.100 by the Supplier. So, answer of this puzzle is Value can be reduced by the Supplier by issuance of Credit Note under Section 34 of CGST Act, 2017. Accordingly, Supplier/manufacturer would be required to discharge net GST on the value of Rs. 90 and Recipient would be eligible for ITC on the value of Rs. 90.
However, practical constraints in this option is that for reducing value by the discount after supply, burden of Proof will be on Manufacturer to prove that Recipient has reversed the proportionate ITC against this discount (second condition of Section 15(3)(b)). Therefore, Manufacturers are generally hesitating to adopt this method of giving discount to dealer by issuance of Credit Notes under Section 34.
b) Discount by way of Commercial Credit Notes Not in terms of Section 15(3)(b):
This is most contentious between Department and Tax payer, When Post-Sales Discount is being given by the Supplier/manufacturer vide Commercial Notes not in terms of Section 15(3)(b). In this method, Supplier without reducing the GST liability, reduce the amount payable by the Recipient on account of discount by issuance of Commercial Credit Notes.
In this case, pertinent to note is that Value of Supply remains intact i.e. Rs. 100. Further, to avail the ITC on the value of Rs. 100, Recipient needs to Pay Rs. 100 along with GST thereon (i.e. Rs. 118) to the Supplier as per Second Proviso to Section 16(2) read with Rule 37.
Further, as per Rule 37, in case Recipient paid the Supplier the amount partly, he needs to pay/reverse the ITC proportionate to the amount not paid to the Supplier. Further, as per third Proviso to Section 16(2), Auditee is eligible for credit of input tax on payment made by him of the amount towards the value of supply of goods or services. In the instant case at hand, as Recipient’s liability to Pay to the Supplier against this Invoice has been reduced by Rs.10 by way of issuance of Commercial Note, it can be concluded that Recipient has Paid Rs. 108 (as against Rs. 118) against this Invoice. Further, as per Rule 37, Recipient is required to reverse ITC proportionate to amount not paid. Accordingly, Recipient is eligible for Credit of Input Tax proportionate to amount paid against this invoice to the Supplier (i.e. 108/118*18).
Moreover, there can be arguments that Dealer/Recipient is not required to reverse the proportionate ITC on following grounds:
a. That is there is no tax loss to the Exchequer as Supplier has paid GST on the value of Rs. 100 i.e. 18, so dealer should be allowed to avail ITC of Rs.18. However, fallacy in this argument in our opinion is that the very basis of second proviso of Section 16 & Rule 37 is against the concept of Tax neutrality. For instance, in case Recipient fails to pay to the Supplier within 180 days for reasons other than discount like due to some disputes etc., in that scenario also, Recipient needs to reverse the ITC even if Supplier has paid the GST to the exchequer.
b. Another argument is that Recipient has not “Failed” to pay as account has been settled by way of issuance of commercial credit Notes. In Rule 37, it is specifically mentioned that proportionate ITC needs to be reversed against amount not paid. Therefore, it needs to be seen that whether Commercial Credit Notes can be considered as payment for provisions of GST though account has been settled by way of issuance of Commercial Credit Notes.
In our opinion, till more clarity is brought upon by the Board/GST Council, Taxpayers should take decision considering all the arguments/options very carefully as per their risk appetite. It would be better if Dealers can convince the manufacturers to issue Credit Notes under Section 34 to save them from any such issue in future.
3) Discount is given in nature of Financial Assistance etc. where calculation of Discount is not linked with invoices
There may be instances where Recipient is receiving Discount in the nature of Financial Assistance from the supplier not linked with the purchase invoices. In this case, the purpose of providing such financial assistance by the Supplier to the Dealer/Recipient needs to be seen. In case there is any counter obligation on the part of Dealer/Recipient like some marketing activities to be performed etc. to receive such financial assistance, then in that case, such financial assistance can be considered against “Supply of Service” as definition of service is very wide in GST Act. Further, in terms of clause 5(e) of Schedule II also, this may get covered in Supply of Service.
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Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue, however, Fab Gyan and its Team respect the difference of opinion and will not be responsible for any mistake.