In today’s competitive market, offering post-sale discounts or incentives has become a common trade practice. However, under the GST regime, the treatment of such discounts is not always straightforward and requires a deep understanding of the legal provisions, judicial precedents, and practical compliance mechanisms.
Statutory Framework: Section 15(3) of the CGST Act
As per Section 15(3) of the CGST Act, the value of supply shall not include discounts provided:
- Before or at the time of supply, if the discount is duly recorded in the tax invoice;
- After the supply, only if:
- The discount is established in terms of a prior agreement made at or before the time of supply;
- The discount is linked to specific invoices; and
- The recipient reverses the proportionate ITC attributable to such discount.
Key Takeaway: Any ad hoc or post-facto discount not backed by a prior agreement will not qualify for deduction from the value of supply.
Judicial Standpoint: What the AAR and Supreme Court Say
In the case of UltraTech Cement Ltd., In re [2018], the Maharashtra AAR denied deduction for post-supply discounts categorized as “rate difference” and “special discount,” since there was no pre-established basis or rationale. The ruling emphasized that such incentives failed to meet the conditions of Section 15(3)(b).
On the other hand, the Supreme Court in Maya Appliances Pvt. Ltd. v. ACCT (2018) took a broader commercial view, observing that offering discounts after sale is a recognized trade practice, especially in dynamic and competitive industries. The Court confirmed the validity of such discounts, stating that they need not always be disclosed at the time of original sale, particularly when driven by market forces.
Issuance of Credit Notes: Legal Limitation
Section 34(1) of the CGST Act allows issuance of credit notes in cases of deficiency in supply or when the taxable value is found to be excess. However, it does not explicitly allow credit notes solely for post-supply discounts that were not agreed at the time of supply.
Further, as per the proviso to Section 34(2), if the burden of GST has already been passed on, the supplier is not allowed to reduce the output tax liability via credit notes.
Practical View: Credit Notes Without GST
Despite statutory restrictions, in genuine commercial situations, suppliers may issue credit notes without GST purely as a financial adjustment. In such cases, since no GST adjustment is being made, the recipient is not required to reverse ITC, and the full credit remains valid. From an accounting perspective, this is treated akin to a post-sale commercial settlement, not impacting tax liability.
Tracking ITC Reversal: Past & Present
One of the long-standing challenges has been the lack of visibility on whether the recipient has reversed the proportionate ITC, as required under Section 15(3)(b)(ii).
Earlier, CBIC via Circular No. 212/6/2024-GST dated 26-06-2024 provided that the supplier could rely on a certificate from a Chartered Accountant or Cost Accountant confirming that the ITC reversal has been duly made by the recipient.
Introduction of Invoice Management System (IMS)
With effect from 1st October 2024, the Government introduced the Invoice Management System (IMS) to provide greater transparency and control over invoice matching and ITC tracking.
Key features of IMS:
- Invoices and credit notes uploaded by the supplier in GSTR-1/IFF will appear in the recipient’s dashboard.
- The recipient can accept, reject, or keep the invoice pending.
- If no action is taken, it is deemed accepted and auto-reflected in GSTR-2B.
- Rejection of a credit note by the recipient will increase the supplier’s liability in GSTR-3B.
- IMS is currently optional but is expected to become mandatory soon.
This system will gradually eliminate the need for manual ITC reversal confirmations and make the compliance process more automated and reliable.
Conclusion: A Balanced Approach is Key
While the law clearly stipulates the conditions for allowing post-supply discounts as deductions from the transaction value, commercial realities often require flexible arrangements. It is therefore crucial for businesses to:
- Formalize discount policies upfront through agreements.
- Use non-GST credit notes for ad hoc incentives.
- Ensure proper documentation and tracking.
- Adopt IMS proactively for seamless compliance.
Understanding the balance between legal permissibility and commercial practice is essential to minimize disputes and ensure smooth GST compliance.
Also Read: Key Ruling on GST Refunds in Case of Inverted Duty Structure
