The Madras High Court recently observed that post-supply discounts offered by a supplier to the recipient cannot be included in the transaction value/value of supply for levying GST. The High Court distinguished between subsidy offered by a third party and a discount and noted that a discount by itself cannot qualify as subsidy.
Introduction to Taxability of Discounts under GST
Before discussing the case, I think it is important to provide contest of the type of discounts envisaged under CGST Act, 2017 and their manner of inclusion and exclusion from the value of supply.
Section 15, CGST Act, 2017 contains stipulations as to which amounts can or cannot be included in the value of a taxable supply, where both the recipient and supplier are not related, and price paid or payable is the sole consideration for supply. Section 15(3)(a) states that discounts offered at the time of or before a supply shall not be included in the value of supply in such discount has been duly recorded in the invoice in respect of such supply. Section 15(3)(b), which was in focus in the impugned case, states that a discount after a supply has been effected shall not be part of value of supply if: (i) such discount is established in terms of agreement entered into at or before the time of such supply and specifically linked to relevant invoices; (ii) ITC as is attributable to the discount on the basis of the document issued by the supplier has been reversed by the recipient of the supply.
Typically, discounts offered before or at the time of supply are excluded from the value at the time of generation of invoice itself. While discounts offered after the supply cannot, due to their nature be reflected in the invoice per se, but the value can be reduced by filing credit notes thereafter and linking it to the supply in question. It is the latter kind of discount that was the Madras High Court’s focus in the impugned case.
Facts and Arguments
The facts of the impugned case were not clearly stated by the Madras High Court in its judgment, but from what one can gather it seems: the petitioner challenged the inclusion of volume discount in the value of supply and the Revenue Department’s stance that the discount was a ‘private’ subsidy. Under Section 15(2)(e) subsidies directly linked to the price are included in the value of supply except subsidies provided by the Central and State Governments. The petitioner’s case was that it paid GST on the transaction value in the invoice which includes the volume discount, and the Revenue Department cannot add the volume discount over and above the invoice amount as it would to double taxation on the same amount. The petitioner contended a manufacturer would incentivize the distributors to sell mobile phones on a discount and such discount cannot be construed as a subsidy under Section 15(2)(e).
The Revenue Department seems to have added the discount value to the invoice by claiming that the discount is a subsidy by a third party and amounts to consideration under Section 2(31)(b), CGST Act, 2017. The Revenue Department’s order under challenge before the High Court also mentioned that the after-supply discount must be as per the terms agreed and based on certain parameters and workable criteria. And a discount cannot be offered at the complete discretion of the supplier. The Madras High Court held that the order was unsustainable in law and liable to be quashed.
Madras High Court Decides
The Madras High Court made three observations that were vital to the dispute and are our understanding of when post-supply discounts can or cannot be included in the value of supply:
First, the High Court observed that Section 15(2)(e) of CGST Act, 2017 will only come into play when a part of the consideration payable for the supply is subsidized by third party other than the Central Government or the State Government. While this is a straightforward interpretation of the impugned provision, it is a necessary clarification for frequently some basic and obvious things need to be made clear to the Revenue Department. (para 45)
Second, the High Court observed that a subsidy will be embedded in the transaction value only if it disguised as a discount. However, a discount by itself will not qualify as a subsidy. (para 48) A discount will only be part of the transaction value if it is on account of a subsidy offered by a third party. The High Court was trying to distinguish the discount offered by a supplier on their own account and a discount offered due to contribution by a third party; the latter being a ‘private’ subsidy that was liable to be included in the value of supply and the former being a discount that as per Section 15(3)(a) and/or Section 15(3)(b), whichever is applicable, not being part of the value of supply. While this an important distinction, it still leaves open the question of how a discount is to identified and distinguished from a ‘private’ subsidy. We do know that a discount does not by itself become a subsidy, but we don’t know when they transform into a subsidy.
Third, the High Court stated the discount can only impact the transaction value of the supplier and its recipient. And there is no scope for confusing the further supply made by the recipient and the sale it effected to its customers and the discount it offered. (paras 51-52)
As I stated above, the High Court did not narrate the facts clearly, so it is difficult to understand some of its observations especially the third observation listed above. But, after reading the judgment, it does seem that in this case this is what transpired:
A supplied goods to B, which included the price of volume discounts and GST was calculated by including the value of volume discounts. When B further supplied those goods to C on a discounted value, the Revenue Department included the discount value offered by B in the transaction value of supply made from A to B contending that the discount offered by B to C was a subsidy provided by A to B. This not only caused the possibility of double taxation of the discount, but also inter-relating two different supplies and not treating them independent of each other. The value of supply from A to B was calculated in reference to the value of supply from B to C and the High Court frowned on the same.
Conclusion
The Madras High Court’s judgment is succinct on its findings on law and almost equally precise on the facts, though the latter lack clarity which is an impediment to completely understanding its approach to the underlying dispute. Despite the hiccups in comprehension, the High Court’s findings on law are welcome and clarify an important aspect on the GST implications of discounts and their impact on the value of supply.