GST on month end discount to distributor

[Shrikanth Parmarthy]

Dear Sir/madam,

Facts of the case:

1. We sold 1000 kg of product sold to distributor @360 per kg with 12% gst resulting in ITC of INR 43,200 to distributor.

2. Distributor is eligible for Quick payment scheme wherein he will get a discount of 60 per kg during the month end based on prior agreement for which credit note of INR 60,000 is issued without GST. Please note that credit note can be linked to original invoice

3. The distributor is sells the 1000 kg to ultimate customer @ 310 per kg( after adding his margin of 10 rupees) with 12% gst. This will result in Net ITC of 6000 left out in Distributors credit ledger.

Query:

1. Can we issue commercial credit in the above scenario as only 2 conditions set out in Section 15(3)(b) (ii) are satisfied or should we issue GST credit note.

2. Will the above transaction result in loss to the government as the distributor will always be left with ITC in his account?

Kindly help

[Ramanathan Seshan]

Dear Shrikhanth-sir,

1. Can we issue commercial credit note or must it be a GST credit note?

Relevant Law:

Section 15(3)(b) of the CGST Act, 2017 allows a supplier to issue a GST credit note for post-sale discounts if:

• (i) The discount is established in terms of an agreement entered into at or before the time of supply,
• (ii) The discount is linked to relevant invoices, and
• (iii) The recipient reverses proportionate ITC.

Your Case:

• The discount is agreed beforehand ✅
• It is linked to the original invoice ✅
• But the distributor is not reversing proportionate ITC ❌

Therefore, you cannot issue a GST credit note unless the distributor reverses the proportionate ITC of ₹7.20/kg (i.e., ₹7,200 on ₹60,000 discount at 12% GST).

Implication:

• Since all three conditions are not fulfilled, you must issue a commercial credit notewithout GST.
• This means you won't reduce output tax liability, and the distributor's ITC remains unchanged.

2. Will the government face a revenue loss due to excess ITC in distributor's ledger?

Yes, temporarily — but conditionally.

In your scenario:

• Distributor paid GST on selling price = ₹310/kg (on ₹310,000 @12% = ₹37,200 output GST).
• But had ITC of ₹43,200 (from your invoice).
• Net excess ITC in his ledger = ₹6,000.

Issue:

• This ₹6,000 is blocked in the distributor’s credit ledger.
• If not used against other taxable supplies, it may result in a working capital issue, but not an immediate revenue loss.
• Loss to government arises only if this ITC is claimed as refund (e.g., in case of inverted duty structure or export).

Conclusion:

Point	Treatment
Credit Note	Issue a commercial credit note (without GST) since all conditions under Sec 15(3)(b) are not met
Output Tax Liability	Cannot reduce your GST output tax
Distributor's ITC	He keeps full ₹43,200 ITC, but will have ₹6,000 excess unless adjusted later
Government Revenue	No immediate loss unless excess ITC is refunded; otherwise, it's just timing

Recommendation:

If feasible, the distributor should reverse proportionate ITC of ₹7,200, so that you can issue a GST credit note and reduce your output tax accordingly. This ensures clean compliance and no blocked ITC.

Regards,

S Ram

[YAGAY andSUN]

This is an excellent query involving Section 15(3)(b) of the CGST Act, treatment of commercial credit notes, GST credit notes, and the implications on ITC accumulation. Let's address your queries step-by-step:

✅ FACTUAL SUMMARY

Manufacturer to Distributor:

Qty: 1000 kg @ ₹360/kg + 12% GST = ₹4,03,200 (₹3,60,000 + ₹43,200 GST)

Distributor gets ITC: ₹43,200

Month-end discount of ₹60/kg based on agreement → ₹60,000 total discount (no GST in credit note)

Distributor to Customer:

Sells @ ₹310/kg (i.e., ₹300 + ₹10 margin) + 12% GST

Value: ₹3,10,000 + ₹37,200 GST

Output tax liability: ₹37,200

ITC vs. Output:

ITC = ₹43,200

Output GST = ₹37,200

Surplus ITC: ₹6,000

🔍 QUERY 1: Can you issue a commercial credit note or must it be a GST credit note?

Legal Background – Section 15(3)(b)CGST Act:

A supplier can reduce the value of supply via GST credit note only if:

"(b) the value of the supply is reduced by the supplier by issue of a credit note [in respect of discount], subject to the following conditions:

(i) such discount is established in terms of an agreement entered into at or before the time of such supply; and

(ii) such discount is specifically linked to relevant invoices; and

(iii) input tax credit attributable to the discount has been reversed by the recipient of the supply."

✅ In your case:

Condition (i): Met → Pre-agreed monthly discount (Quick Payment Scheme)

Condition (ii): Met → Credit note is linked to original invoice

Condition (iii): NOT MET → Distributor is not reversing ITC of ₹43,200

❌ Therefore, you cannot issue a GST credit note unless ITC is reversed by the distributor.

✅ You can issue a commercial credit note (without GST), but this will not adjust your GST liability. It simply adjusts the financial consideration between supplier and distributor, but has no impact on the tax already paid.

🔍 QUERY 2: Will this result in loss to the government due to ITC accumulation?

✔️ Answer: Not a loss, but working capital inefficiency for the government.

The government has collected ₹43,200 from the supplier as GST

The distributor has only paid ₹37,200 as output tax

The leftover ₹6,000 remains as ITC in distributor's ledger – not refunded unless under refund category (e.g., inverted duty structure or zero-rated exports)

So technically:

No loss to government – tax was paid and not refunded

However, it leads to accumulation of credit in the hands of the distributor, which:

Hurts working capital

May prompt refund applications under eligible circumstances

✅ Recommendation:

Issue a commercial credit note without GST

Ensure distributor does NOT reverse ITC if you’re not issuing a GST credit note

Document clearly that it is a financial discount, not a post-supply taxable adjustment

If your intent is to adjust GST liability, the distributor must reverse proportionate ITC, and a GST credit note should be issued.

📌 Optional Strategy (if workable):

To avoid ITC buildup, consider offering pre-invoice discounts or modifying the billing rate upfront to ₹300 and reflecting distributor margin separately.

***

[Shrikanth Parmarthy]

Thank you experts for your valuable advice

[K.lakshmipati rao]

Dear Mr. Shrikanth Parmarthy- I draw your attention to new amendment of Section 34(i) of CGST Act.

Consequent enactment of Finance Bill 2025 on dt.29-03-2025, the amendment of Section 34 of CGST Act, in sub-section (2), for the proviso, the following proviso shall be substituted, namely:-

 Provided that “no reduction in output tax liability of the Supplier shall be permitted, if the—

(i) input tax credit as is attributable to such a credit note, if availed, has not been reversed by the Recipient, where such Recipient is Registered person;

    Or

(ii) incidence of tax on such supply has been passed on to any other person, in other cases.”

[Shilpi Jain]

Issuing a GST credit note is at the option of the supplier and it is not compulsory.

Also there is no loss to govt. as the tax is actually paid in full by supplier which is taken as credit.

[Ganeshan Kalyani]

Sec. 34 provides that the taxpayer may issue credit note with GST when ... (conditions given). So, it is an option at the taxpayer end to issue credit note with or without GST.

AI Summary

Manufacturer Issues Credit Note for Quick Payment, Navigating Complex GST Discount Calculation and Input Tax Credit Implications A manufacturer sold 1000 kg of product to a distributor at 360 per kg with 12% GST, issuing a credit note of 60,000 for a quick payment discount. The distributor resells at 310 per kg with 12% GST. The key legal issue is whether to issue a commercial or GST credit note, considering Section 15(3)(b) conditions are partially met. While the discount is pre-agreed and invoice-linked, the distributor did not reverse proportionate input tax credit, necessitating a commercial credit note without GST impact.