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Credit Notes and accounting implications of Discounts & Incentives for GST

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Credit Notes and accounting implications of Discounts & Incentives for GST
By: Raginee Goyal
March 19, 2018
  • Contents

I.               THE CONCEPT:

A.    WHAT IS A CREDIT / DEBIT NOTE

A Credit or a debit note serves the purpose of accounting adjustment to settle the correct amount of value and tax for any invoice already issued in the same or earlier period. GSTR 1 is to capture information of all debit / credit note(s) issued by a registered person.

While furnishing details of a debit note/credit note, the details of the original debit note/credit note is required to be mentioned in the GSTR -1 which needs to be precise and correct to avoid any mismatch.

B. BASIC PURPOSE OF CN/ DN

  • Credit/ Debit Note can be issued by a taxable person who had earlier issued a tax invoice for supply of any goods and/or services.
  • Credit/ Debit note has to be issued where tax invoice has charged excess value and/or excess tax charged than required.

C.    PARTICULARS TO BE CONTAINED IN A DN/ CN:

  • Name, address and GSTIN of the supplier;
  • Nature of the document;
  • A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters -hyphen or dash and slash symbolised as “-” and “/”respectively, and any combination thereof, unique for a financial year;
  • Date of issue of the document;
  • Name, address and GSTIN or UIN, if registered, of the recipient;
  • Name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is un-registered;
  • Serial number and date of the corresponding tax invoice or, as the case may be, bill of supply;
  • Value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient;
  • Signature or digital signature of the supplier or his authorized representative.

D.     TIME LIMIT FOR ISSUANCE OF CN/ DN

A registered person can issue a credit note not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier.

[Refer Section 34 (2) of CGST Act, 2017]

Thus, for FY 2017-18, no credit note can be issued post September 30, 2018 or filing of annual return (due date of filing of annual return is December 31, 2018).

E.    VARIOUS TRANSACTIONS RELATING TO THE SUBJECT OF CREDIT NOTES/ DEBIT NOTES

  • SALES RETURNS (ALIAS RETURN OF GOODS SUPPLIED)
  • DISCOUNTS (PRE SUPPLY / POST SUPPLY)
  • CHANGE IN PRICE/ VALUE OF SUPPLY
  • CANCELLATION / TERMINATION OF SUPPLY POST BILLING
  • INCIDENTAL EXPENSES RELATING TO SUPPLY
  • INCENTIVES/ COMMISSION/ BACK-ENDS

 RETURN OF GOODS SUPPLIED :

There may be two broad scenarios is case of return of goods supplied in view of the transition to GST:

(a)   Goods Supplied in Pre-GST period – returned in post GST period

(b)  Goods supplied in Post GST period returned in post GST period

Let us examine the various situations that may arise in each of the above scenarios:

(a)  Return of Supplies made in pre-GST period (i.e. before
01.07.2017) and when returned post GST (i.e. after 01.07.2017)

  •  WHEN SUPPLIES WERE MADE TO REGISTERED PERSONS:

When goods supplied to registered person are returned by the said registered person, the return of such goods is considered as a supply.

The registered person returning the goods shall issue tax invoice charging requisite tax on such return and the recipient of the returned goods can avail     ITC of the GST as charged in the invoice.

[Refer Proviso to Section 142 (1) of CGST Act]

  • WHEN SUPPLIES WERE MADE TO UNREGISTERED PERSONS:

(i) Where the supplies were made on or after 01.01.2017:

            (a) When such goods are returned on or after 01.07.2017 but on or before 31.12.2017, refund of tax so paid can be applied by the registered supplier      under   the old law.

            (b) When such goods are returned after 31.12.2017, no refund of tax so paid shall be given to the supplier under the old law.

[Refer Section 142 (1) of CGST Act]

(ii) Where the supplies were made before 01.01.2017:

When such goods are returned on or after 01.07.2017, no refund or reversal of tax so paid is allowed.

  • DISCOUNTS

Credit Notes were popularly used for accounting of discounts in the pre-GST regime since discounts are inherent part of any commercial transaction. Discounts go on to reduce the amount recoverable from the customer. However, it is noteworthy that all discount shall not result in reversal of corresponding GST applied on them. Discounts can be classified in two broad categories –Pre supply discounts and Post Supply Discounts.

Pre Supply Discounts get captured in Invoice itself and tax is accordingly charged. Post Supply Discounts need to be treated as per provisions of law. The following situations may arise for accounting and tax treatment relating to rice revision and discounts:

(i)     Post Supply Discounts in post GST period relating to pre GST supplies ( i.e. supplies made prior to 01.07.2017)

  • If supply was made to a registered person:

If supply was made by a registered person to another registered person before 01.07.2017 and price for the same is revised upwards or downwards on or after 01.07.2017, issue of supplementary invoice or debit note or credit note (as the case may be) by the registered supplier to the recipient, within thirty days of such price revision has been allowed.

Section 142(2) (a) & (b) of CGST Act, 2017 provides that the supplementary invoice or debit note so issued shall be treated like a GST Invoice and the the credit note so issued for any post sale discount shall reduce the output liability of the issuer and essentially require the recipient of the credit note to reduce his input tax credit for the said period

  • If supply was made to an unregistered person:

No tax can be reversed on any credit note issued to an unregistered person against any post-sale discount given post 01.07.2017 for any sales prior to 01.07.2017.

            [Refer Proviso to Section 142(2) (b) of CGST Act, 2017]

(ii)    Pre-Supply Discounts relating to post GST supplies (i.e. supplies made after 01.07.2017)

Pre Supply discounts like trade discount etc. are discounts which are given before or at the time of supply as part of the normal trade and commerce. Such discounts are pre-agreed/ contracted/ known and are recorded in the invoice itself and are allowed to be excluded while determining the taxable value and GST shall be levied on value of invoice after discount. No credit is required in such cases.

            [Refer Section 15(3) of CGST Act, 2017]

(iii)   Post-Supply Discounts relating to post GST supplies (i.e. supplies made after 01.07.2017)

Post Supply discounts are discounts which are given after the supply of goods is made. Any discount given post supply can be excluded while determining the taxable value for calculating GST liability subject to the following conditions:

  • discount is established in terms of a pre-supply agreement between the supplier and the recipient;
  • such discount is linked to specific relevant invoices, i.e. invoice details should be mentioned in credit note;
  • input tax credit attributable to the discounts is reversed by the recipient i.e. no reversal of post supply discount can be made in case where supplies was made to unregistered supply.

For all transactions entered into in Post GST period, the above issues are subject to the Section 15 of the CGST Act, 2017, which determines value of taxable supply. Sec 15(1) stipulates that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. That means the price actually paid or payable will be considered as transaction value only when two conditions are fulfilled simultaneously, viz.

i)     Supplier and recipient are not related, and

ii)    Price is the sole consideration.

Therefore, if no conditions are fulfilled or if only one of the two conditions are fulfilled, then the amount paid or payable shall not be considered as transaction value and recourse to Section 15(4) will be taken. In some industry segments like electronic goods, consumer durables, mobile handsets, computers, laptops, parts and peripherals, cement, etc., it is common practice that the manufacturer/ distributor supplies to the dealers/ resellers at a determined price, whereas, these dealers/ resellers supply to the consumers at a lower price offering store discounts/ bulk discounts  for penetration. The discount so offered or price reduced for supply to the consumers is compensated by the manufacturer/ distributor at a pre agreed rate or at an agreed value later.

The questions that arise in the above situation is that whether credit note for quantity discount can be issued by the manufacturer/ distributor? If yes, what are the conditions/ challenges? What if no discount is given post supply, rather the contract lays that the company gives backends /incentives/ volume based commission to its distributors? Is GST to be applied to the credit note since value of supply is reduced and in case GST is not reversed on the credit note, can the Department force the company or the distributor or both to do so? Does the position change if an invoice is issued by the dealer/ reseller to the supplier for the incentives to be received from the manufacturer/ distributor?

Is a commission agent / CFA/ reselling bound to issue invoice for commission to be received from distributor/ manufacturer or can the company issue a credit note without / without recovering the GST reversible on it? What is overall best practice keeping in view the compliance and the accounting perspective under GST ?

There is one school of thought which argues that all post sale discounts shall be excluded from the value of supply because, the Department will view it not with an angle of reversing ITC but to add the value of such discounts and incentives to the value of outward supplies. The logic behind this is that the company had agreed/ directed the dealer to supply the goods at lower prices, else the dealer will not supply at lower prices. The dealer would supply the goods at higher prices with a reasonable profits. Here, the dealer is aware that he would be substantially compensated by the company by way of credit notes and it is only for this reason, that he sells it off at such discounted prices. Hence, it is a pre contracted discount which may or may not be quantified before the supply is made to the dealer. As such, price is not the sole consideration, and therefore 15(4) will be invoked. Once it is established that ‘price is not the sole consideration’, it is not even necessary to examine whether the supplier and recipient are related or not. Therefore, these will be included in the value of supply and taxed accordingly.

However, the above view is a pro revenue, conservative and high-handed view which arises due to the past experience in pre GST regime, where goods and services were taxable under different regimes. To understand business transactions and to apply the provisions while handling the accounting and tax treatment, the first understanding that is required is that GST is a common law for taxing goods and services in the same manner and the provisions of Section 15 will also operate in light of the definitions of the term “outward supply”, “inward supply” and Section 7.

Discount is reduction in consideration/ price change relating to inward supply of goods supplied whereas, Commission/ incentive is consideration for supply of services. Discount and Incentives cannot be used as interchangeable terms in business transactions and shall depend on the facts and circumstances of each contract/ agreement under which they are paid. No general view can be taken that a discount given is commission or incentive received.

The best practice shall be to examine the agreement and accordingly first decide, whether commission or incentive is to be paid to the dealer, in such case, an invoice should be issued by the dealer/ reseller claiming the same for supply of services in the nature of an agent for selling goods of the manufacturer/ distributor. The invoice shall be subject to GST, irrespective of the fact, whether the incentive is under a pre determined contract or agreement or not, or it is linked to specific invoices or not. The manufacturer/ distributor shall claim ITC of the said GST charged in the commission/ incentive invoice.

Whereas, if discount is extended to the dealer/ reseller by the manufacturer/ distributor, the same shall be treated as a price revision/ discount relating to the inward supply received by the dealer/ reseller, invoice cannot be issued by the recipient. A debit note for the inward receipts though may be issued, if the supplier does not issue credit note. In order to determine GST, first, it needs to be ascertained whether the discount given was part of the contract/ agreement which was entered into before the supply was made. If the terms of discount are pre agreed, it shall be treated as a pre supply discount even if the quantification based on quantity etc. is done later.  However, the pre agreement cannot in itself establish that price is not the sole consideration, as price can be determined / revised in normal business transactions. The offer of a pre agreed discount cannot in any manner imply that price is not sole consideration, since discount is also a part of price.

The reversal of GST on the said credit due to downward revision, shall depend upon the satisfaction of all three  shall be subject to all the three conditions of Section 15 (3) shall  which are: (a) discount is established in terms of agreement before the supply; (b) discounts are specifically linked to specified invoices, and (c) the recipient has reversed its credit.

If the terms of discount was not agreed before making the supply or if the discount offered is not linked to specific invoice, the supplier cannot reduce the GST output liability which was charged in the original invoice. However, if both the above conditions are fulfilled and the supplier reduces the GST against original invoice, such reduction in output liability of supplier shall be subject to the fact that the recipient also reverses the ITC availed against the original invoice. If the supplier himself does not reduce the output liability in the credit note, there is no provision or law in GSTwhich mandates him to do so and the recipient also cannot be forced to reverse ITC, which was duly paid to the Government by the supplier. The consumer stands benefitted by such price reduction and the GST on the discount received by the dealer is also received by the Government. Reversal of ITC and charging of GST are both results of levy of tax which result in recovery and hence cannot be done beyond the provisions of law.

 

By: Raginee Goyal - March 19, 2018

 

Discussions to this article

 

very useful article. the responsibility to issue debit note or credit note in relation to supply is cast on the supplier of the goods. if supplier want to get benefit of GST then he has to charge the same in the credit note. yes, there is no compulsion on the supplier to take GST benefit on credit note. if he just want to reduce the amount he can do so without impacting GST.

By: Ganeshan Kalyani
Dated: 19/03/2018

Hey!

Awesome one. I have some query...

How should a credit note be issued in case where there is a reduction of gst rates?

Does the rebate is given by a ship linner to the custom house agent in line with discount or should it be considered as outward supply by the cha?

By: Kartik Shah
Dated: 20/03/2018

GST credit on pre Emi interest/assured rental/late possession penalty as special discount after supply of services us15(3)(b) of CGST act.

If we pay as per agreement to sale, monthly pre Emi interest/assured rental/late possession penalty on sale of under construction flats to customers, Can we reverse GST by issuing credit note on pre Emi interest/assured rental/late possession penalty as special discount after supply of services us15(3)(b) of CGST act.

By: aditya Kumar
Dated: 16/04/2018

Dear Sir,

Please also confirm what will be the GST rate applicable on the same, if it is a post-supply discount? whether it will be that of underlying supply or of residuary service category

By: Dhanpati Shah
Dated: 24/05/2018

Is GST applicable on Incetives?

By: VISHAL MALI
Dated: 01/03/2019

 

 
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