GST on Trade & Cash Discount and reversal of ITC by buyer.

Updated: Nov 29, 2018

Providing trade and cash discounts is almost every entity will do in the normal course of business. And it is common to give discounts and price reductions during negotiations and after supply of goods and services. Business generally offer trade discounts to increase sales, while cash discounts are given for speedy recovery.

As per section Sec.15 of the CGST Act 2017.,

“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 specified in the invoice; 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.”

There is no difference in GST between trade and cash discounts. In fact, GST segregates the discounts allowed into two categories:

  • Discount given before or at the time of supply, and

  • Discount given after the time of supply.

Discount allowed before or at the time of supply: If has been mentioned in the invoice separately, it will not be added in the value of supply.

Ex: A ltd offers a 10 % discount on the sale of goods worth Rs. 5000. If the company mentions the discount amount separately in the invoice, the value of the taxable supply will be Rs.4500/-

Discount allowed after the supply: it may or may not be added in the value of the supply, depending upon following:

  • The discount has been allowed as per the terms already agreed upon before or at the time of supply, or

  • The discount can be linked directly to the invoice of supply,

  • The input tax credit (ITC) related to the amount of the discount allowed has been reversed by the recipient of the supply.

Hence, the arrangement between the supplier and buyer would decide whether the discount in relation to any supply could reduce the GST liability of the supplier to the extent of such discount. If post supply discounts were not anticipated at the time of supply, it is not allowed to be deducted from value.

Cash Discount

Ex: A company offers cash discount of 20% if a customer makes payment of a particular invoice within 30 days. In such a situation the discount will not be added to the value of taxable supply. The customer has to reverse the ITC on the amount of the discount allowed.

Cash Discount not agreed before or at the time of supply

Ex: A company doesn’t have a policy of cash discounts at the time of payment, however, has supplied goods to a customer who didn’t pay his debts. If this company now offers the customer a 20% discount in order to encourage the customer to clear all his debts, but the discount wasn’t agreed before or at the time of supply, hence this discount will be added in the value of the taxable supply an no need to reverse the GST by the buyer on his earlier purchases to the extent of GST portion on discount.

How supplier will ensure reversal of ITC by the buyer?

The GST Law about treatment of discounts is clear and uniform across the country. The practical application of the law makes the issue complicated. Mainly because the supplier’s benefit of taking credit of discount allowed is completely dependent on reversal of ITC by buyer. A supplier cannot have any control over the buyer’s action on the treatment of discount in his books.

So to get the credit for sure, a mechanism which could possibly be tried is, credit note on account of discount uploaded by the supplier in GSTN portal would automatically reduce the ITC of the buyer.

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