Whether closing stock be adjusted for Target Incentive Discounts received from suppliers and GST Treatment, Goods and Services Tax - GST

[PANKAJ MASKARA]

Can Target Incentive Discounts received from suppliers be reduced from the value of closing stock? What is the correct GST treatment for such discounts?

Also, if the discount is not adjusted, it result in overstated profit because the Unsold closing stock is shown at a higher value.

Posts / Replies

[Ramanathan Seshan]

Dear Pankaj-sir,

Yes, Target Incentive Discounts (also called year-end or volume-based discounts) received from suppliers can and often should be adjusted against the value of closing stock, provided certain conditions are met. Let’s break this into two parts: accounting treatment and GST treatment under Indian law.

🔹 1. Accounting Treatment of Target Incentive Discounts

Yes, such discounts should ideally reduce the cost of purchases, and consequently, reduce the value of closing stock if they relate to the goods still in stock. This aligns with the matching principle and ensures profit is not overstated.

• Rationale: If you received goods with an implicit discount (incentive), the effective cost of those goods has reduced. If unsold stock is carried at the higher cost (before discount), it inflates the closing stock value and overstates profit.
• How to adjust:
  • If the discount is known and quantifiable at year-end, you should apportion it over the related inventory.
  • Journal Entry:
  •  

 plaintext

Copy Edit

Supplier Incentive Receivable A/c Dr To Purchase A/c / Inventory A/c

🔹 2. GST Treatment of Target Incentive Discounts

Under Section 15 of the CGST Act, discounts can reduce the taxable value (and thus GST liability) only if:

✅ Conditions for GST Reduction:

1. The discount is established in terms of a pre-agreed contract (i.e., known at or before the time of supply), and
2. The recipient reverses the proportionate Input Tax Credit (ITC) related to the discount.

🔸 Types of Discounts:

Type	GST Treatment	Accounting Treatment
Pre-supply Discount (e.g., trade discount shown on invoice)	Excluded from taxable value (no GST)	Reduces purchase cost
Post-supply Discount (e.g., year-end incentive)	Can reduce taxable value only if pre-agreed and ITC is reversed	Reduces cost of inventory if related to closing stock

🔹 3. What If Discount Is Not Adjusted?

If the Target Incentive Discount is not adjusted:

• Profit is overstated (closing stock is shown at higher cost).
• Financial statements do not reflect true performance.
• Taxable income may be higher (leading to more income tax).
• GST ITC remains unaffected unless reversed or credit note is issued as per GST norms.

✅ Summary:

Aspect	Treatment
Accounting	Reduce cost of inventory/purchases if discount relates to unsold goods
GST	Allowed only if pre-agreed and ITC reversed; else no adjustment
If Not Adjusted	Overstated profit and mismatched inventory valuation

Regards,

S Ram

[YAGAY andSUN]

Accounting and GST Treatment of Target Incentive Discounts (TID)

1. Can Target Incentive Discounts be Reduced from Closing Stock Value?

Yes, from an accounting and income tax perspective, Target Incentive Discounts (TID) received from suppliers can and should be apportioned to inventory cost, especially if they are linked to purchases and achieved based on cumulative targets.

According to:

• ICDS-II (Valuation of Inventory) under Income Tax Act
• AS-2 / Ind AS-2 on Inventory Valuation,

Purchase cost includes all discounts and rebates (including target-based) that are linked to purchase volume or milestones.

If the discount relates to past purchases that are still unsold, a proportion of the TID should logically be reduced from the closing stock value, failing which the inventory would be overvalued, and profit overstated — as you rightly pointed out.

2. GST Treatment of Target Incentive Discounts

Under Section 15(3) of the CGST Act, a discount is allowed as a deduction from the value of supply only if:

• It is known at the time of supply (e.g., mentioned in agreement/invoice), or
• If given after supply, then:
  • It must be established in terms of a pre-existing agreement,
  • It must be linked to specific invoices, and
  • The recipient must reverse ITC proportionately.

In the case of TIDs:

• They are usually given after supply, based on achieving a purchase target over a period.
• If the agreement meets the above conditions, suppliers can issue a credit note under Section 34, and you must reverse the corresponding ITC.
• If conditions are not satisfied (e.g., discount not linked to specific invoices), the supplier cannot reduce the GST liability, and the discount is treated as a financial credit (non-GST impact).

✅ Summary Table

Aspect	Treatment
Accounting (Closing Stock)	Yes, proportionate TID should reduce inventory value
Income Tax (AS-2 / Ind AS-2)	TID reduces cost of purchase, hence affects closing stock
GST (Supplier Side)	Can reduce value only if conditions in Sec 15(3) are met
GST (Recipient Side)	ITC reversal required if credit note issued and matched to invoices

[Kashish Gupta]

Dear Members

Adding to the above, it may be noted that originally the compliance with condition specified under section 15(3)(b)(ii) of the CGST Act was, impliedly, based upon 'matching principle' envisaged in section 43 of the CGST Act. In other words, the condition regarding reversal of ITC by recipient was expected to be shown as satisfied once matching happens on common portal i.e., details of credit notes furnished by supplier stands matched with claim for reversal of ITC by recipient (credit notes auto-populated in GSTR-2A are accepted by recipient).

However, due to non-operationalisation of said matching concept, technicalities are seen arising during assessment proceedings wherein demands towards Output Tax Liability reduced on account of issuance of credit notes are being confirmed for want of proof of reversal of ITC by recipient. Prima-facie this requirement is hit by doctrine of impossibility but assessment orders are not being passed in favour of the assessee.

CBIC came out with a Circular No. 212/06/2024-GST dated 26.06.2024 wherein it has been admitted that requisite facilities were not made available and then, it has been clarified that in cases where ITC is above Rs. 5,00,000/-, supplier may procure CA Certificate from recipients stating that ITC has been reversed by recipient. Astonishingly, said Circular dated 26.06.2024 has clarified the similar requirement even for past cases. To Quote:

"2.3. However, there is no system functionality/ facility presently available on the common portal to enable the supplier or the tax officer to verify the compliance of the said condition of proportionate reversal of input tax credit by the recipient.

.......

2.8. ...........Even for the past period, where ever any such evidence as per section 15(3)(b)(ii) of CGST Act in respect of credit note issued by the supplier for post-sale discounts is required to be produced by him to the tax authorities, the concerned taxpayer may procure and provide such certificates issued by CA/CMA or the undertakings/ certificates issued by the recipients of supply, as the case may be, to the concerned investigating/audit/adjudicating authority as evidence of requisite reversal of input tax credit by his recipients."

Equally important is to take note of amendments made in section 34(2) of the CGST Act, 2017 by Finance Act, 2025 which reads as under:

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 a registered person; or

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

Therefore, for the past periods (atleast prior to Circular dated 26.06.2024), demands in such type cases are legally not sustainable because it is not a supplier's function to ensure compliance with legal requirement for reversal of ITC by recipient at recipient's end.

Hope the above clarifies.

Best Regards

Adv. Kashish Gupta (85108 06440)