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Credit Notes and accounting implications of Discounts & Incentives for GST

Goods and Services Tax - GST - By: - Raginee Goyal - Dated:- 19-3-2018 Last Replied Date:- 16-4-2018 - 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 orig .....

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e 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 recipie .....

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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 CANCEL .....

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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) .....

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7: 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 s .....

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son 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 .....

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(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 D .....

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entioned 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 pr .....

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onditions 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 discou .....

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tives/ 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 receive .....

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plies. 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 quant .....

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, 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 in .....

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o 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 invoi .....

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ed 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 rev .....

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er 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 t .....

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