GST on cash discount given through credit notes

[sunilkumar bhageria]

We are selling goods to our customer applying 18 % GST. IN some case party makes early payment of the bill hence cash discount is allowed through credit notes to such customer on without any GST (cash discount condition some time mentioned in PO some time not).Should we apply GST also on such cash discount at the time of issuance of C Note .

[Venkataprasad Pasupuleti]

GST on discount portion can be reduced from outward liability by issuing credit note. The requirement is that the agreement/PO shall have clause regarding discount.

[KASTURI SETHI]

In support Sh. CAVenkataprasad Pasupuleti's reply, read Section 15 (3)(b)(i) of CGST Act. The customer must be aware of the nature of discount to be received by him at the time of supply of goods or services, or before the supply. If documentary evidence is not produced to this effect, the department can deny the discount on the ground that the discount was not known to the customer.

As per Section 15(3)(b)(ii) of CGST Act, discount through credit notes is allowed only if it is linked to the relevant invoice. The particulars of invoices must be shown in credit notes. In terms of sub-clause (b)(ii) above, the post supply discount is allowed when the ITC attributable to the discount is reversed by the customer. This condition will apply only if the customer has taken the credit of the tax paid by the supplier.

[Ganeshan Kalyani]

Credit Note can be issued without GST. The provision laid down the condition for the GST to be charged on the credit note. So, if the condition is satisfied then only GST can be charged on the Credit Note.

[Kashish Gupta]

Dear Sunil Bhageria Ji,

Before discussion about requirement to issue credit note, we must be clear on whether the transaction amounts to a discount or not? In this regard, reference should be made to the ruling passed in case of M/s Ultratech Cement Limited reported as 2018 (7) TMI 1761 by Maharashtra AAR. Relevent extract of said ruling is reproduced hereinbelow:

• The bare word 'discount' mentioned in an agreement without there being any parameters or criteria mentioned with it would not fulfill the requirement of Section 15 (3) (b)(i) of the CGST Act, as the word 'discount' if left open ended or without any qualifications or criteria attached can mean there can be any percentage of discount ranging from bare minimum to even 100% as per discretion of the supplier and certainly such abnormal discounts without any criteria or basis can in no way be considered as fair and at arm's length business transactions and no taxation statute can be construed to be having open ended discount with legislative intent.’

Therefore, if the quantum of discount is not described on the invoice or any documents entered prior to supply, even in such circumstances, supplier is debarred from reducing taxable value of the supply by way of issuing a credit note.

Now, moving further, presuming that quantum of discount is defined in the relevant document, input tax credit related to such discount is required to be reversed by recipient as well. Since as on date the matching provisions are not operational, it is advised to take confirmation from the recipient along with a statement of accounts wherein accounts payable has also been duly adjusted.

Where the discount has not been defined in the relevant document, then supplier is not allowed to reduce the taxable value of supply.

[sunilkumar bhageria]

Thank you very much Kashish and other members who replied . When i am saying we are not applying GST at the time of issuance of credit note against cash discount means that we have not reduced our liability of GST . We have paid GST on full value of invoice and subsequently issued credit note against Cash discount without any GST reversal hence paid higher GST at the same time customer is also availing higher input credit as there is no reversal of GST in Credit note.So my query is though on our part we have paid higher GST (paid on full invoice value without considering credit note) but customer has availed excess input credit as he has not reversed the same at the time of accounting of Credit note as there is not GST in credit note. So is it ok as per legal provision or not and what should be right approach treating the cash disocunt terms is mentioned in the PO itself of customer.PL calirfy further in view of above

[KASTURI SETHI]

With reference to your further query at serial no.5 above, in this scenario, go deeply through the following case law (emphasis is on para no.5) :

2007 (212) E.L.T. 369 (Tri. - Mumbai) = 2006 (11) TMI 85 - CESTAT, MUMBAI in the case of Brown Craft Industries Ltd. Vs.CCE, Thane-II.

This case law explains your situation.

[Ganeshan Kalyani]

Sir, even if the terms of discount is mentioned in PO, you cannot charge GST on Credit Note. As in addition to this, the corresponding customer also need to reverse the credit which he has taken based on the tax invoice issued at the time of original supply. In my view, if you do not charge GST on the credit note, it will not be an issue, because there is no revenue loss to the Govt.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Your reply has made the concept clear. If credit note is issued without GST, no confusion/dispute. Buyer will not reverse anything. The situation is of revenue neutrality. No loss to anyone. Permissible.

AI Summary

GST on cash discount: credit notes reduce supplier tax only if discount known pre supply and linked to the invoice. GST on cash discounts via credit notes is permissible to reduce supplier taxable value only if the discount and its parameters were disclosed to the recipient at or before supply and the credit note is linked to the original invoice; absent such pre-supply documentation, post-supply open-ended discounts cannot reduce taxable value. Where allowed, the recipient must reverse any related input tax credit, and practical measures (recipient confirmation, account statements) are advisable given current matching limitations.