GST on month end discount to distributor, Goods and Services Tax - GST

[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

Posts / Replies

[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 note without 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