Post-sale discounts represent price reductions offered by sellers to buyers, occurring either during the transaction, after its completion, or once certain objectives are met. This document explores the effects of these discounts on the GST value of supply.

Treatment of Post-sale Discount under GST

Section 15(3) of the Central Goods and Services Tax (CGST) Act, 2017 outlines that discounts can be applied at various stages of a supply: before, during, or after the transaction.

For discounts granted either before or concurrently with the supply, their inclusion on the invoice is mandatory to lower the supply's taxable value.

When discounts are provided post-supply, several conditions must be fulfilled for them to decrease the supply value:

1. The discount terms were established in agreements made at or prior to the supply time.
2. Discounts must correspond to particular invoices.
3. The recipient is required to reverse the associated input tax credit.

If a supplier offers a discount based on the volume of purchases, this scenario is treated as a distinct service supply. The recipient can then issue an invoice for the discount amount, applying GST accordingly.

If the aforementioned criteria are not satisfied, the supplier is permitted to issue a financial credit note without imposing Goods and Services Tax (GST). In this situation, the recipient can claim the full input tax credit from the initial invoice.

Can Output Liability Arise on Post-sale Discount under GST

Post-sale discounts affect output liability in several ways:

1. If a discount is granted without requiring further customer action and aligns with pre-agreed terms, it reduces the supply's value. The supplier must issue a credit note to lower their output liability.
2. Discounts tied to customer performance, like reaching a sales target, are deemed separate transactions. The customer then acts as a service supplier, issuing an invoice to the original supplier for the discount amount.
3. When a supplier offers an extra discount to a dealer to facilitate lower prices for end consumers and boost sales, this is considered a payment from the supplier to the dealer. If the dealer is required to pass this benefit to the customer, the dealer must pay GST on the full supply value (customer's price plus the discount). If the dealer is not mandated to pass on the discount, it's a commercial incentive. The supplier issues a credit note, and the dealer does not adjust the supply value for the end customer.
4. For discounts that do not meet Section 15(3) conditions, the supplier can issue a financial or commercial credit note without altering GST liability. Consequently, the customer's input tax credit from the initial supply remains unchanged.

A Credit Note for Post-sale Discount under GST

To implement a discount, the supplier is obligated to issue a credit note to the buyer. This document must be issued by November 30th of the subsequent financial year or by the date of filing the annual return, whichever comes first. The credit note's impact is recognized in the month it is issued.

Post-sale Discount under GST HSN Code

Discounts lack a distinct Harmonized System of Nomenclature (HSN) code because they serve as adjustments to the initial tax invoice's value. Therefore, the HSN code from the original invoice must also be stated on the credit note.

Post-sale Discount under GST – Example

Here are several examples illustrating how post-sale discounts are applied under GST.

Case 1: Mr A, a supplier, sold goods worth Rs 2,00,000 to his customer, Mr B. In addition to the goods, Mr A charges Rs 15,000 for shipping additionally. Mr A also offers a 2% discount on booking and an additional 1% discount if payment is made within 30 days.

Case 2: Mr B pays within 30 days; Mr A shall issue a credit note of Rs 2,107 along with GST. Since terms were agreed upon at the time of the transaction, this amount qualifies for deduction from the original value.

Case 3: Mr A has an agreement with Mr B which specified a special discount of 0.5% given only when aggregate monthly purchases exceeded Rs 10,00,000. In the next month, Mr B purchased goods worth Rs 15,00,000. Mr B is eligible for an additional discount of Rs 7,500 + GST.

Case 4: Mr A provides an additional discount of 2% to Mr B to increase the sales, and Mr B is obligated to pass on such a discount to the final consumer, Mr C. Mr B, which initially sold goods at Rs 10,00,000, after incentive from Mr A, sold goods at Rs 9,80,000 to Mr C.

Case 5: Assuming there is any discount/adjustment by the supplier which is not meeting any of the above conditions. Mr A can issue a commercial credit note to Mr B without charging any GST.