Discount given after supply has been made under GST

Crux of this article - Action plan for drafting clause relating to post-supply discount in agreement entered into at or before the time of supply

Introduction

Section 15(3) of CGST Act, 2017 deals with deduction of discount given by supplier of goods/services to recipient from taxable value of supply of goods/services.

Such discount is given either before or at the time of supply or after the supply is made.

After the deduction of discount from the taxable value of supply, GST liability is computed on the net amount i.e. (taxable value - discount).

In common parlance, discount which is given after supply is made is known as post-supply discount.

The conditions for deduction of post-supply discount from taxable value of supply are prescribed in section 15(3)(b) of CGST Act, 2017 which states that

(3) The value of the supply shall not include any discount which is given -

(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.

In other words, discount provided after supply is made shall be excluded from value of supply upon fulfillment of following conditions

1. Such discount is established in terms of agreement which is entered into at or before the time of supply and
2. Such discount is specifically linked to relevant supply and
3. Input tax credit attributable to such discount has been reversed by the recipient of goods/services

The above 3 conditions need to be satisfied cumulatively so that the discount given after the supply is made, becomes eligible for deduction from taxable value of supply.

Practically supplier is able to satisfy the condition no. 2 and 3 easily.

Supplier will be able to link the post-supply discount with relevant supply made and get the recipient reverse the input tax credit attributable to such discount.

But its not easy to satisfy condition no.1

The condition no.1 “discount is established in terms of agreement which is entered into at or before the time of supply” seems to be simple in implementation but is not so.

However, it can be made simple if the business enterprises follow certain principles while drafting agreement to be entered with their customers for supply of goods/services.

Those principles are to be followed especially while drafting clause relating to  post-supply discount in such agreements.

Principles laid down by AAR (Maharashtra) in respect of establishment of post-supply discount in terms of agreement entered into at or before the time of supply

Authority for Advance Ruling (Maharashtra) in case of M/s Ultratech Cement Ltd. held that

• Post-supply discount is said to be established in terms of agreement entered into at or before the time of supply when
• A fixed and specific quantum or percentage of discount is mentioned in such agreement or
• The basis/criteria/parameters for computing the quantum or percentage of discount are predetermined and mentioned in such agreement.
• Just by mentioning the bare word “discount” in such an agreement without any criteria/parameters mentioned therein, will not satisfy the condition of being “established in terms of agreement entered into at or before the time of supply.”
• Only mentioning the word “discount” would mean that there can be any quantum or percentage of discount ranging from bare minimum to even 100% as per the discretion of supplier of goods
• Therefore, supplier has to clearly mention a fixed quantum or percentage of discount in the agreement.
• Alternatively, supplier has to clearly mention criteria or parameters for arriving at quantum/percentage of discount in the agreement
• Then only it can be said that discount is established in terms of agreement entered into at or before the time of supply in real sense

Action plan for drafting the clause relating to post-supply discount in the agreement entered into at or before the time of supply

Practically, what should be criteria or parameters for arriving at post-supply discount, that are required to be mentioned in the agreement.

The types of post-supply discount commonly offered in business environment are as follows

• Cash discount
• Quantity discount
• Year-end discount given on the basis of performance during financial year

Cash discount

Cash discount is given to encourage customers to make early payment of sale consideration

The example of criteria or parameters for computing cash discount, which are eligible to be mentioned in the agreement are as follows

For payment made in 15 days from date of supply - cash discount@5% of sale consideration

For payment made in 30 days from date of supply - cash disount @10% of sale consideration

Quantity discount

The example of criteria or parameters for computing quantity discount, which are eligible to be mentioned in the agreement are as follows

For purchase of 200 to 500 quantity of goods - 5% discount on catalogue price
For purchase of 500 to 800 quantity of goods - 10% discount on catalogue price
For purchase of above 800 quantity of goods -  15% discount on catalogue price

Year-end discount given on the basis of performance during financial year

In normal practice year-end discount is given by manufacturers of goods to their authorized dealers on the basis of their performance during financial year in terms of quantity of goods sold by them to retailers and ultimate consumers.

The example of criteria or parameters for computing year-end discount, which are eligible to be mentioned in the agreement are as follows

For 20000 to 50000 quantity of goods sold during financial year to consumers - 5% discount on list price in respect of goods sold by manufacturer to dealers in succeeding financial year

For 50000 to 70000 quantity of goods sold during financial year to consumers - 10% discount on list price in respect of goods sold by manufacturer to dealers in succeeding financial year

Please take due care that discount should not be open ended that is range of discount is ineligible

For example

Cash discount : For payment made in 15 days from date of supply - cash discount@5% to 7% of sale consideration   Not admissible

Quantity discount : For purchase of 200 to 500 quantity of goods - 5% to 7% discount on catalogue price  Not admissible

Year-end discount : For 20000 to 50000 quantity of goods sold during financial year to consumers - 5% to 7% discount on list price in respect of goods sold by manufacturer to dealers in succeeding financial year  Not admissible

Discount should not be open-ended because offering range of discount would mean that rate of discount to be offered is still at discretion of supplier.

Further mentioning that rate of discount to be offered, will be decided by supplier from time to time in the discount clause of the agreement is also not admissible.

Sample of clause

“The company will pay discount at such rates as may be decided by the company from time to time on the quantity sold to dealers in particular month.”   Not admissible

Link of advance ruling of M/s Ultratech Cement Ltd.