GST on Post Sale Discount

[Murari Agrawal]

I have gone through most of the discussions on the subject on this forum. It is clear that discount can be reduced from the taxable value only if the conditions under sec.15(3)(b) are satisfied. For any post sale discount without previous agreement, Supplier has to issue financial credit note without GST.

My only question is whether the buyer will have to reverse the ITC to the tune of such post sale discount. This question arises in my mind due to following:

1) In 2019 (3) TMI 928 AAR, Tamilnadu (Re:MRF), it has been held that ITC has to be reversed for the amount not paid due to discount in the light of proviso to Sec.16

2) Circlular C.B.I.& C. No.92/11/2019 GST dated 07.03.2019, under Heading Secondary Discounts - clause (vi), says that there is no impact of availability or otherwise of ITC in the hands of Supplier. However, there is no mention whether or not it affects the recipient/buyer.

[KASTURI SETHI]

Reversal is required. If the discount is received with GST effect, then the buyer is required to reverse proportionate credit availed as is attributable to the discount received.

[KASTURI SETHI]

IWhy to take ITC on that portion/quantum of value on which tax has not been paid ?

[GUNASEKARAN K]

1. Discounts which are given before or at the time of supply:- In case of discount offered before or at the time of supply, then there is no problem to supplier because in this case discount shall be mentioned on invoice itself by supplier and GST shall be leviable on net taxable value. i.e. taxable value minus discount.

2. Discounts which are given after the sale has been effected:- In this case, there may be two situations –

a) One, if the conditions under section 15(3) of the CGST Act, 2017 have been met:- If conditions laid down in section 15(3) of the CGST Act, 2017 are satisfied, the discount value shall not be included in taxable value of supply and GST shall be charge by supplier on net value. i.e. taxable value minus discount.

b) Second, if the conditions under section 15(3) of the CGST Act, 2017 are not met:- Please note that by withdrawing the Circular No. 105/24/2019-GST dated 28th June, 2019, the unsettled issue of Circular No. 92/11/2019-GST dated 07th March, 2019 shall remain exist. In the interest of ease of doing business and to ensure no litigation on this issue in future, concept of commercial/ financial credit note (without GST) must be applied uniformly to all such scenarios of post-sales discounts, falling short of the conditions as mentioned under section 15(3)(b) of the CGST Act, 2017. It is needless to mention that the CBIC itself has accepted the concept of a commercial/ financial credit note (without GST) in its earlier circular dated March 7, 2019, which was reiterated in Circular 105 as well.

Disclaimer: This is ex facie view and it should not be construed as professional advice or suggestion.

[Murari Agrawal]

Sri Sethi Ji & Sri Gunasekaran Ji, we shall be issuing commercial credit note without GST effect for post sale discount against an invoice. The buyer will make payment to us for the original tax invoice after adjusting such credit note amount.

The only issue is weather the buyer will be required to reverse proportionate ITC to the tune of amount less paid by him due to such credit note from the amount of ITC already availed by him on the original Tax Invoice.

[GUNASEKARAN K]

Whether the Applicant is liable to reverse the ITC proportionately to the extent of financial/ commercial credit note issued by the supplier?

Ans. No, The AAR, Andhra Pradesh, in the matter of Vedmutha Electricals India Pvt. Ltd. [2023 (6) TMI 1051 - AUTHORITY FOR ADVANCE RULING, ANDHRA PRADESH] ruled that assessee is eligible to take full credit of GST charged in invoice issued by the supplier even though later commercial/financial credit note has been issued.

The AAR, Andhra Pradesh observed that the provisions of section 15(3)(b) of the CGST Act can only be applicable if there was a prior agreement and a link is established between the relevant invoices and the discounts provided. In this case, no such correlation was found between the credit notes issued by the supplier and the Applicant. As a result, the benefit of reducing the value of the discount from the transaction value, as per the provisions of section 15(3)(b), was not allowed.

The AAR noted that the financial credit note should not be used as a means of fraudulently transferring ITC by inflating an invoice and held that the post-supply discount received by the Applicant from the supplier did not impact the transaction value between the parties. Therefore, the Applicant is eligible to take full credit of the GST charged in the tax invoice and was not required to reverse the ITC to the extent of the financial or commercial credit notes issued by the supplier.

Similar to the above ruling the AAAR, Tamil Nadu in Re: M/s. MRF LTD. [2019 (8) TMI 307 - APPELLATE AUTHORITY FOR ADVANCE RULING, TAMILNADU] ruled that, in case of financial/commercial credit note which is only adjustment of commercial transaction, no GST impact is there. Thus, there is no need of reversal of ITC by the buyer. Therefore, the buyer is eligible to take full credit of GST charged in the tax invoice issued by the supplier, even if a financial/ commercial credit note is issued later, subject to the condition that there is no mis-utilization of financial/ commercial credit note.

[KASTURI SETHI]

Sh.Murari Agrawal Ji,

If financial credit note is issued by the supplier, reversal is not required inasmuch as the supplier has not reduced original tax liability.

Pl. see the decision of AAAR Kerala in ref. Santosh Distributors reported as 2021 (7) TMI 789 - APPELLATE AUTHORITY FOR ADVANCE RULING, KERALA

[Murari Agrawal]

Thanks very much Sri Gunasekaran ji & Sri Sethi ji

[KASTURI SETHI]

In continuation of my reply above, It is pertinent to highlight that Section 34 (1) of CGST Act mentions the word, 'may' and not 'shall' as mentioned in Section 34 (3) for debit note. The word, 'may' signifies discretion of the supplier. Hence the supplier can issue credit note without tax adjustment.

[Padmanathan KV]

In case of post sale discount by way of financial credit note, no ITC reversal is required in hands of the recipient. This is because the supplier has paid GST on the full invoice value at the time of sale and he has not subsequently reduced his output GST.

In case of post sale discount under section 15(3)(b), where GST credit note is issued by supplier, the supplier can reduce his value of outward supply only if the recipient reverses the corresponding ITC. In other words, supposing the recipient doesnot reverse the ITC then Department will reverse the GST amount reduced from the outward supply from the supplier. I.e. The onus is on the supplier to ensure that recipient has reversed ITC so that he can reduce the value of supply.

AI Summary

Input tax credit reversal depends on whether post sale discounts alter taxable value under prior agreement linkage or remain commercial adjustments. Whether buyers must reverse input tax credit for post sale discounts turns on whether the discount qualifies to reduce taxable value under the prior agreement and linkage criterion. If it does, the supplier issues a tax credit note and the recipient must reverse proportionate ITC. If it does not, suppliers commonly issue financial/ commercial credit notes without GST effect and recipients generally retain the ITC originally claimed, provided there is no misuse or fraudulent invoice inflation.