Discounts and free offers given by merchants/sellers on the products & services provided to their customers have been included under the Goods & Services Tax (GST) system. Many merchants or manufacturers offer discounts on their offerings as a marketing strategy to increase the sales of these products/services.
GST, which was implemented on July 1, 2017 as a unified indirect tax system in India, has provisions for the levy of tax on the cash discount and other discounts offered by sellers on their supplies. GST on discount has been divided into the following two types.
- Discount applied during or before the supply is made
- Discount applied after supply is made
In this article, we will discuss the treatment of discount under GST in both cases mentioned above.
According to section 15 of GST Act, any discount given before, during or after the supply is not included in the value of the supply for taxation purpose.
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GST on Discounts at (or before) Time of Supply
Discount that is applied on a product/service before or at the time of supply or at the time of invoicing can be deducted from the supply value, given that the discount is separately mentioned in the GST invoice.
For example, you as a merchant offer 10% discount on the purchase of over Rs 5,000. If a customer purchases goods worth Rs 5000, he will be eligible for a 10% discount, i.e. Rs 500, and the final value of supply would remain Rs 4,500 (5000 – 500), given that the discount amount is mentioned separately in the invoice. So, the GST would be payable on the final value of supply, i.e. Rs 4,500.
So, when a discount is applied at or before the time of supply (amount not charged from the buyer) and mentioned separately in the invoice, GST is not levied on the discount amount.
GST on Discounts After Supply
Sometimes a seller offers a discount on the supply after the sale has already been made. The purpose is to improve collection or to make the customer loyal by giving them an after-discount. The thing to note here is that such discounts are not mentioned separately in the sale invoice and not applied to the value of supply at the time the supply is made or invoice is produced. Therefore, GST on discounts would be applicable unless the following conditions are met:
- There is a written agreement provided before or at the time of supply, mentioning the discount conditions and timeline.
- Discount offered should be linked to the supply invoice for which it is made.
- Input tax credit (ITC) available on the discount amount should have been revered by the buyer.
GST would not be levied on the discounts amount only if all the above conditions are fulfilled. Otherwise, GST at the same rate as on supply would be levied.
