Discounts form an integral part for the suppliers for incentivizing sales. Offering discounts to customers, retailers or to whomsoever the supplier is selling the goods helps him to establish good relations and offer a reduced price to the ultimate consumers. There are majorly two types of discounts from a GST perspective: pre sales and post sales discount.
The discounts offered directly in the invoice or before the execution of the sales transaction are known as Pre sales discounts. The discounts which are not known until after the sale has taken place or decided in the terms of agreement of sale are known as Post Sales discounts. In this article we will be looking at the Post Sales Discounts also known as the secondary discounts and their impact in computing the value of supply as per GST.
What are Secondary discounts?
Secondary discounts are the ones that are not known at the time of making the supply. These do not form part of the agreement of sale made between the supplier and his customer. These are generally given after the agreement is executed. There are no obligations to be fulfilled in order to get these discounts.
For instance, a supplier sold 500 packets of chips to a wholesaler at 10 rupees per packet but then the supplier revalued the selling price of the chips to 9 rupees in order to boost its sales. This is a type of secondary discount. The supplier will now issue a credit note in order to display the sale at its new correct value.
Impact of Secondary Discounts in GST:
The supplier issuing credit notes for secondary discounts to ensure to issue commercial credit notes that do not reduce the original tax liability. Circular No. 92/11/2019-GST includes the following points:
“iv. 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.
v. In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.
vi. There is no impact on availability or otherwise of ITC in the hands of supplier in this case.”
this explains that the credit notes issued as secondary discounts should not impact the value of supply and therefore should not be reduced from the taxable value of the supplies since they were not known at the time of making the supply.
Summarizing the same, there is no effect of secondary discounts in the value of supply to be reported in GST. Therefore, the credit notes issued should not add GST amount while recording the same in the books as the same won’t reduce the GST payable for that sale.
There is no impact in relation to the ITC availability. The government has also clarified that the ITC can be claimed on the original tax paid on the purchase from the supplier. The dealer is not required to reverse the ITC proportionate to the credit note pertaining to the secondary discounts.
Although, in case of post sales discounts offered, the terms of which were known at the time of supply, the credit note issued should be along with the GST amount thereby reducing the tax liability as well. The dealer is also required the reverse the ITC with respect to the amount mentioned in the credit note.
As seen from the above article, Post sale discounts do not impact the value of supply. These discounts do not reduce the tax liability. As for the supplier, there is no impact on his ITC availability.
CA Prashant Taparia