Turnover discount, Accounting - Auditing

[Vinayak Daga]

1. Discounts to be received on the basis of Turnover( Purchase ) from Seller on the basis of FY 23-24, it is on the basis of structural discounts as per purchase agreement, which is depends totally on purchase turnover and in some cases no agreement is present

2. Discounts to be received are in the form of Commercial Credit Notes without GST..(No GST is reversed).

3. What should be the treatment of Credit Notes described above in the books of Buyer/Purchaser?

a. Whether such received discount should reduce from purchase in trading account?

b. or it should be shown as indirect income?

Any other clarification will be briefed.

Thanks for your kind reply and participation.

Posts / Replies

[YAGAY andSUN]

Based on the facts stated, where discounts are received based on turnover (linked to purchases for FY 2023-24), and credit notes are issued without GST (i.e., commercial credit notes, not under Section 34 of the CGST Act), the accounting treatment in the hands of the buyer/purchaser is governed by both GST principles and generally accepted accounting practices (GAAP). Below is the legal and accounting view:

1. Nature of the Credit Notes – Commercial Credit Notes Without GST

• Since no GST is reversed and the credit note is not issued under Section 34 of CGST Act, it qualifies as a commercial credit note and not a tax credit note.
• These are typically issued post-sale, based on turnover slabs or year-end performance incentives, and are not linked to the invoice-by-invoice discount.

2. Accounting Treatment in Buyer’s Books

a. Should it be reduced from purchases?

No, generally it should not be reduced from purchases, unless the credit note is directly linked to specific purchase invoices or the original purchase amount was overstated due to lack of discount application.

b. Should it be treated as indirect income?

Yes – In the case of commercial credit notes not reducing GST liability, such discounts are to be shown as "Other Income" or "Discounts Received" under indirect income in the Profit & Loss account.

Supporting Guidance – ICAI and GST Law

• As per ICAI Guidance Note on Tax Audit (Clause 26) and Revised Schedule III, post-sale volume-based discounts, not linked to specific purchases, and where no GST is reversed, should be treated as income.
• GST Law (Section 15 of CGST Act) permits exclusion of discounts from taxable value only if:
  • It is established in the agreement before supply; and
  • Input tax credit is reversed proportionately.

Since no ITC reversal is being made and these credit notes are not GST-adjusted, they are purely commercial adjustments, and do not affect taxable turnover or purchase value under GST.

Conclusion

In the books of the buyer, commercial credit notes received without GST based on year-end turnover-based discounts:

• Should be recorded as “Indirect Income” under “Discounts Received” or “Other Income”.
• Should not be netted off from Purchases in the trading account unless directly traceable to specific purchase invoices (which is not your case).

Additional Clarification

• Ensure proper documentation (emails, letters, agreements, or internal approvals) supporting the basis and calculation of the discount.
• These commercial credit notes will have no impact on GST returns (GSTR-2A/3B), as no GST is involved.

If required, I can help with journal entry formats and presentation in financials.

[Vinayak Daga]

• As per ICAI Guidance Note on Tax Audit (Clause 26) and Revised Schedule III, post-sale volume-based discounts, not linked to specific purchases, and where no GST is reversed, should be treated as income.  can you please share me the relevant documents/ snapshots.

[YAGAY andSUN]

https://www.slideshare.net/slideshow/tax-audit-guidance-notepdf/254864168?utm_source=chatgpt.com