GST on discounts and dealer schemes

The basic rule: discount on the invoice

GST is charged on the transaction value. When a discount is given before or at the time of supply and is recorded on the invoice itself, GST is worked out on the price after the discount. Nothing else is needed.

Example. A paint distributor sells 100 tins at a list price of ₹1,000 each and gives a 10% trade discount on the invoice.

The discount must actually appear on the invoice. A discount promised verbally and settled later is not an invoice discount.

Discounts given after the sale

Post-sale discounts are common in distribution: quarterly turnover discounts, rate differences, price-drop protection. Under Section 15(3) of the CGST Act such a discount can reduce the taxable value only when all of these hold:

• the discount was set out in an agreement made at or before the time of supply (a written scheme circular or dealer agreement helps);
• it can be linked to the specific invoices it relates to;
• the supplier issues a GST credit note for it; and
• the buyer reverses the input tax credit that relates to the discount.

If these conditions are not met, the supplier can still give the discount, but through a financial (commercial) credit note that carries no GST. The supplier's output tax stays as originally charged, and the buyer keeps the original ITC. See credit notes and debit notes in GST for the time limits that apply to GST credit notes.

Common scheme types and how they are treated

Read the last row carefully. If a dealer must do something in return for a payment, such as putting up your signboard, the amount may be consideration for a service and not a discount at all. The facts of each scheme decide this.

Buy one get one free: a worked example

A shampoo stockist sells a pack of two bottles for ₹200 (tax-inclusive at 18%) under a 'buy 1 get 1' offer. Nothing is free here: the customer pays ₹200 for two bottles. The taxable value is ₹200 ÷ 1.18 = ₹169.49 for the pack, and ITC on both bottles stays available because both were sold.

When the two items carry different GST rates, the price has to be split between them in a reasonable way, or the pack may be treated as a mixed supply taxed at the higher rate. Keep the working on file.

Recording schemes so they hold up

1. Issue the scheme in writing before the sales period starts, with dates, slabs and the products covered.
2. Show on-the-spot discounts as a separate column on the invoice, not as a lower 'net rate' with no trail.
3. At the end of the scheme, list the invoices each credit note covers.
4. Decide for each credit note: GST credit note (tax reduced) or financial credit note (no tax). Do not mix both for the same discount.
5. Tell the dealer in writing when they must reverse ITC, and keep their confirmation if you can.

The planning side of schemes, such as slab design and margin impact, is covered in managing dealer schemes and discounts.

Mistakes that lead to notices

• Reducing output GST with a credit note for a discount that was never agreed before the sale.
• Issuing GST credit notes after the time limit for the year has passed.
• Free goods given away without reversing the ITC on them.
• A dealer claiming full ITC while you reduced your liability through the same credit note. Your GSTR-1 and the dealer's ITC will not match.

This is general information, not tax advice. Scheme treatment depends on the exact terms, so check unusual schemes with your CA.

Doing this with Tally and Cashflow OS

In TallyPrime, record invoice discounts on the voucher and post-sale discounts as credit notes against the original bills. Cashflow OS reads those entries from Tally. Credit notes appear in the GSTR-1 view alongside the invoices, and the bill-wise detail shows which bills a dealer still owes against. If writing back is switched on, an accountant can raise a credit note from the phone or web; Tally validates it as usual. Cashflow OS does not decide whether a scheme qualifies for a GST reduction. That decision is yours or your CA's.