GST on Discounts or Incentives Given After Supply - Sec 15(3)(CGST Act, 2017
Scope
According to Section 15 (3) of the CGST Act, the value of supply shall exclude discounts if they were known at or before the time of supply and are duly linked to relevant invoices. Discounts provided afterward are permissible only if they were pre-agreed and input tax credit (ITC) is reversed accordingly. There are restrictions on issuing credit notes with GST for discounts not contemplated at the time of supply, and ad hoc discounts given after supply are not deductible from the value of supply.
Besides that, there are case laws in pre-GST and GST regime which support issuance of credit notes after supply. Trade discounts given on basis of performance of dealers in the previous quarter is allowable as deduction held in Maya Appliances v. ACCT (2018)(SC).
In FAQ issued by CBIC in 2018 it was demonstrated that in case of bad debts reduction in liability of the supplier is not allowed by way for GST credit notes.
If a GST credit note is not allowed u/s 34, it will not reduce the value and tax payable on supply.
Concern
Some cases illustrating discounts are given below with respective document and ITC treatment:
| Case | GST Applicability | Credit Note Treatment | ITC Reversal |
|---|---|---|---|
| Discount given at the time of supply (shown in invoice) | Excluded from taxable value | No need for credit note | No reversal of ITC |
| Discount given after supply (pre-agreed in contract & linked to invoices) | Deductible from taxable value | Credit note with GST can be issued | ITC to be reversed by recipient |
| Ad hoc discount (not pre-agreed at time of supply) | Not deductible | Credit note without GST may be issued | No ITC reversal required |
| Trade discounts based on dealer performance (linked to prior quarter sales) | Pre-agreed | Credit note with GST can be issued | ITC to be reversed by recipient |
| Incentives given as a post-supply benefit (not a service consideration) | Not taxable under GST | Not required | Not applicable |
Many businesses provide discounts after supply due to market competition, bulk purchase incentives, or sales targets, often without prior agreement. In such cases, GST laws do not allow a reduction in taxable value and a credit note with GST (financial credit note) is not legally valid.
Action
The action section outlines steps to ensure compliance and avoid associated risks:
- Following things should be kept in mind while allowing discount to customers:
- Post-supply discounts should be documented in P.O/contract with customers before the supply takes place.
- Issue credit notes with GST only when preconditions u/s 15(3) are met; otherwise, use financial credit notes.
- Keep in mind the last date to issue and report a GST credit note u/s 34(2) is 30th Nov following end of FY.
- Keep calculation and basis of discount amounts as supporting of GST Credit notes.
Risk
If GST Credit note issued by supplier do not satisfies conditions of Sec 15(3) or delayed in issuance, the value and tax payable will not reduce resulting in excess payment of tax, where financial credit note would serve better.
There is also risk of disallowance of ITC, and that tax on basis of incorrect GST credit note could lead to penalties and interest liability.
CA Mahipal Sharma | Partner | FCA | CISA | B.Com
Contact: +91 7023030160 | email: mahipal013@gmail.com
CA Pramud Jain | Partner | FCA | LLB | FA-FP | B.com
Contact: +91 9784117770 | email: pramud.jain91@gmail.com
Share this article:
