Discounts in GST

In a general sense, discount is an allowance or deduction made from a gross

sum on any account whatever. In a more limited and technical sense, it means
the taking of Interest in advance. By the language of the commercial world and
the settled practice of banks, a discount by a bank means a drawback or
deduction made upon its advances or loans of money, upon negotiable paper or
other evidences of debt payable at a future day, which are transferred to the
bank.1

Section 15(3) of the CGST Act, 2017 reads –

(3) 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 duly
recorded in the invoice issued in respect of such supply; 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.

This basically means that Discounts given before or at the time of supply will
be allowed as deduction from transaction value. Such discounts must be
clearly mentioned on the invoice.

Discounts given after supply will be allowed only if-

1. It is mentioned in the agreement entered into before sale AND

1
Fleckner v. Bank, S Wheat 33S, 5 L Ed. 631; Bank v.Baker, 15 Ohio St. 87
 2. input tax credit proportionate to the discount has been reversed by the
recipient of the supply AND
3. It can be clearly tracked to relevant tax invoice

EXAMPLE

Naruto is a wholesaler selling tools like drills, polishers, spades etc. He now
sells the power drill to a trader Inazuma for Rs. 4,000 offering a 1% discount.
Naruto incurs Rs. 150 packing charges and to encourage prompt payment, he
also offers additional 0.5% discount if Inazuma pays within 7 days.

PARTICULARS AMOUNT

Power Drill 4,000

Packing charges 150

Discount @1% (on sale value) (40)

Subtotal 4,110

Add: CGST @9% (of 4,110) 370

Add: SGST @9% (of 4,110) 370

Total 4,850

Here, discount has been given after supply. But it was agreed upon at the time
of supply and can be traced to the relevant invoice. So it will be allowed to be
deducted from the transaction value.

For this, Naruto Ltd will issue a credit note to the transferor of TDR( for Rs 20
(0.5% of Rs 4,000 = Rs 20+ GST@ 18% on Rs 20 = Rs 3.60), and this must be
linked to the relevant tax invoice and deducted.