Credit Notes and accounting implications of Discounts & Incentives for GST
By: – Raginee Goyal
Goods and Services Tax – GST
Dated:- 19-3-2018
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 original debit note/credit note is required to be mentioned in the GSTR -1 which needs to be precise and correct to avoid any mismatch.
B. BASIC PURPOSE OF CN/ DN
* Credit/ Debit Note can be issued by a taxable person who had earlier issued a tax invoice for supply of any goods and/or services.
* Credit/ Debit note has to be issued where tax invoice has charged excess value and/or excess tax charged than required.
C. PARTICULARS TO BE C
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person can issue a credit note not later than September following the end of the financial year in which such 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
* CANCELLATION / TERMINATION OF SUPPLY POST BILLING
* INCIDENTAL EXPENSES RELATING TO SUPPLY
* INCENTIVES/ COMMISSION/ BACK-ENDS
RETURN OF GOODS SUPPLIED :
There may be two broad scenarios is case of return of goods supplied in view of the transition to GST:
(a) Goods Supplied in Pre-GST period – returned in post GST period
(b) Goods supplied in Post GST period retu
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2017, no refund of tax so paid shall be given to the supplier under the old law.
[Refer Section 142 (1) of CGST Act]
(ii) Where the supplies were made before 01.01.2017:
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 supply discounts and Post Supply Discounts.
Pre Supply Discounts get captured in Invoice itself and tax is accordingly charged. Post Supply Discounts need to be treated as per provisions of law. The following situations may arise for accounting and tax treatment relating to rice revision and discounts:
(i) Post Suppl
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t any post-sale discount given post 01.07.2017 for any sales prior to 01.07.2017.
[Refer Proviso to Section 142(2) (b) of CGST Act, 2017]
(ii) Pre-Supply Discounts relating to post GST supplies (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 Discounts relating to post GST supplies (i.e. supplies made after 01.07.2017)
Post Supply discounts are discounts which are given after the supply of goods is made. Any discount given post supply can be excluded while determining the taxable value for calculating GST liability subject to the fol
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alue only when two conditions are fulfilled simultaneously, viz.
i) Supplier and recipient are not related, and
ii) Price is the sole consideration.
Therefore, if no conditions are fulfilled or if only one of the two conditions 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 discounts/ bulk discounts for penetration. The discount so offered or price reduced for supply to the consumers is compensated by the manufacturer/ distributor at a pre agreed rate or at an agreed value later.
The questions that arise in the above situation is that whether credit n
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that all post sale discounts shall be excluded from the value of supply because, the Department will view it not with an angle of reversing ITC but to add the value of such discounts and incentives to the value of outward supplies. 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 quantified before the supply is made to the dealer. As such, price is not the sole consideration, and therefore 15(4) will be invoked. Once it is established that 'price is not the sole consideration', it is not even necessary to examine whether the supplier and recipient are re
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nder which they are paid. No general view can be taken that a discount given is commission or incentive received.
The best practice shall be to examine the agreement and accordingly first decide, whether commission or incentive is to 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 invoice.
Whereas, if discount is extended to the dealer/ reseller by the manufacturer/ distributor, the same shall be treated as a price revision/ discount relating to the inward supply received by the dealer/ reseller, invoice cannot be issued by the recipient. A debit
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nts are specifically linked to specified invoices, and (c) the recipient has reversed its credit.
If the terms of discount was not agreed before making the supply or if the discount offered is not linked to specific invoice, the supplier 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 the recipient also cannot be forced to reverse ITC, which was duly paid to the Government by the supplier. The consumer stands benefitted by such price reduction and the GST on the discount received by the dealer is also received by the Government. Reversal of ITC
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