Treatment of Cash discounts & Trade discounts under GST

Treatment of Cash discounts & Trade discounts under GST

There has been a lot of confusion in treatment of discounts in invoice and questions with respect to which amount should be chargeable to GST. Though the law is pretty clear about it.

GST treats all the discounts such as trade discounts, cash discounts, volume/turnover discounts, etc. Instead, the treatment varies with the timing of discount being given, so we classify the treatment of discounts under the following two categories:

1. Discount given before or at the time of supply, and

2. Discount given after the supply has been effected.

Now, let’s discuss each one of the above with practical aspects

1.Discount given before or at the time of supply

The treatment is simple, the discounts given before or at the time of supply are simply deducted from the invoice value i.e. GST would be charges on discounted value

Suppose, the sale value is Rs.1000 and you provide a discount of 10%.  So, while issuing the tax invoice, you would specify the price of the goods or services as Rs.1000 and deduct discount of Rs.100 showing it in the invoice, which makes the taxable value to be Rs.900. Now, GST would be applied on Rs.900 i.e. the discounted value. Suppose the rate of GST is 12%, so the amount of GST would be 900 x 12% = Rs.108

 2. Discount given after the supply has been effected

These discounts are generally of the nature of periodical turnover/volume discounts or incentives, allowed for buying a particular value of goods/services during a period.

Such discounts will be allowed as deduction from the value of supply only if the following conditions are satisfied:

  1. There must be written contract between the supplier and the buyer, prior to making the supply, which should mention the amount of discount to be given.
  2. Such discount must be able to be mapped to the relevant invoices against which such discount is being given.
  3. Buyer must have reversed the Input Tax Credit pertaining to the discount he is now receiving.

Let’s understand this with the example we used earlier, if the discount of Rs.100 is being allowed after the sale has been effected, on satisfying the conditions as mentioned above, the seller can raise a credit note for the amount of discount along with the GST thereon, and the buyer will raise a corresponding debit note. This way, the supplier’s value of the supplies for the month will be reduced by Rs.100 for that month and consequentially he will not be paying GST on the discount.

However, we should check if the conditions are met:

  1. There is an agreement in existence prior to making the sale
  2. Discount can be mapped to invoices to which it pertains
  3. Buyer has reversed the ITC with respect to this Rs.100, in case he has claimed ITC on the whole amount of Rs.1000

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Comments (15)

  • ROHIT TALWAR Reply

    “A” is manufacturer and supply goods to “X” on wholesale price less Pre-defined Trade Discount & Cash Discount at time of supply and reduces the same in the TAX INVOICE itself and charged GST on reduced value of goods.
    “X” made payment of the Invoice on due dates.
    Subsequently based on the total supply of goods, “A” issue Credit Notes towards Discount called as Quantity Discount/Incentives etc. without mentioning any GST on the said value and paid through Cheque/DD/RTGS/NEFT to “X” or even allowed “X” to deduct the value of Credit Notes from future payables.
    My Question is :
    What is the treatement of this Credit Note in the hands of “A” as well as in the hand of “X” under GST Act?
    Will “X” is liable to pay GST on Credit Note issued by “A” and reduce his ITC but in this case “A” is not ready to take the Input tax credit on Credit Note issued by him.

    Is there any violation of GST law in it ? “A” has not reduced his GST Liability nor “X” has reversed ITC on account of such Credit Note. There is no impact of Revenue as well.

    December 15, 2017 at 10:26 am
    • admin Reply

      A has reduced the discount on the invoice and has charged GST on the reduced amount. So, is the subsequent quantity discount given by A is over and above the trade/cash discount?

      If no, why is there a need to issue a credit note in the first place?

      if yes, A needs to issue a credit note, including GST on it. while X would reverse the ITC if any availed on the reduced amount

      December 19, 2017 at 10:59 am
      • Ajay Reply

        In first query. If A don’t want to reduce his GST liability . Then x can carry same gst amount or should he need to reverse gst amount on the additional discount..

        April 14, 2018 at 3:48 pm
  • HEMANTHREDDY ONTEDDU Reply

    If A buys from B 100 bags of cement at Rs 100 and sells to C at Rs 80. By anticipating discounts from B but some discounts are announced others discounts are not announced before the sale. If Rs 10 is announced and Rs 20 is not announced discounts which he gets after three months of purchase. Can A get refund of gst for unannounced discounts

    December 28, 2017 at 8:43 pm
    • admin Reply

      For the unannounced discounts, whenever it is announced, the seller can raise a credit note for the amount of discount along with the GST thereon, and the buyer will raise a corresponding debit note.

      This would be subject to fulfillment of the conditions as mentioned in point no.2 of the above article.

      January 9, 2018 at 12:31 pm
  • HANIL Reply

    WE HAVE AN AGREEMENT WITH DISTRIBUTORS FOR CASH DISCOUNTSAND PRODICE CASH DISCOUNT THRORUGH INVOICES . IF THE DISCRIBUTOR DELAULTS THE PAYMENT TERMS AND WE ARE FOPRCED TO REVERSE THE CASH DISCOUNTS. IS THE DISCOUNT REERSAL IS TAXABLE?

    January 23, 2018 at 9:29 am
    • admin Reply

      If the discount is being reversed for default of payment, this means the the value of which tax should be charged would increase by that amount, this will increase the tax liability

      April 20, 2018 at 8:35 am
  • DIMPLE BAJAJ Reply

    Hi Sir,
    My question is if i purchased 1kg material @1000 purchaser paid GST on 1000 and after that he took claim on 1000 also in next month purchaser got discount of 100 on same invoice. Whats the use of reverse GST on 100 Rs because we already paid GST on 1000 and claim the same why unnecessary we do the exercise of reverse GST and then supplier claim. we cant take it without GST becuase it will not be effected revenue . I think it will be useful if purchaser sold it in increased price.
    please tell me

    February 3, 2018 at 7:44 am
    • admin Reply

      The overall impact as you said is nothing, but if you do not do the reversal it brings the following impact:

      1) The transparency of transaction is lost
      2) You were eligible to take net credit on Rs (1000-100), but you took it on 1000, though seller also paid the tax on 1000, if there is no reversal, such technique can be used to transfer ITC to another party, as you could see you already got an inflated credit on Rs 100, this will be used by taxpayers to transfer the excess ITC balance they have with them, which otherwise cannot happen

      April 20, 2018 at 8:43 am
  • Sai kamuni Reply

    i m supplier of goods and there is a no agreement relation to deduct discount on post sale of goods..my question is what if my buyer made payment on discount basis can you suggest me can i pass discount entries after post sale discounts in GST Regism..

    April 12, 2018 at 11:27 am
    • admin Reply

      Post sale discounts are allowed only after fulfillment of the conditions

      April 20, 2018 at 8:45 am
  • Gurjit singh Reply

    Entry may be:

    Suppllier a/c Dr 1000
    Discount a/c cr 800
    purchase tax a/c a/c cr 200

    April 19, 2018 at 10:36 am
  • Nikita Reply

    Hello Sir,
    My question is what will be the GST rate if following case for goods falling in HSN code 6307:
    Sale value as shown in invoice is 1100/-
    Discount @ 10% is 110/-
    Net sale value (discounted value) is 990/-.

    What will be the gst rate in such case, 12% or 5%..??

    April 23, 2018 at 1:27 pm
    • Deepak Sharma Reply

      Pre sale discount is less from sale value is allowed as per Gst Law hence taxable value consider after discount value so in that case 5% gst rate applicale.

      May 2, 2018 at 6:02 am
  • Arvind Reply

    Hello Sir,

    Under GST if we are giving post sale discount, under which HSN should we enter the discount.

    May 9, 2019 at 5:26 am

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