Discounts, warranties, and free samples in GST
- Sep 11, 2017 | Hardik Lashkari
Before and during the roll out of GST, taxpayers focused primarily on understanding key factors such as transition, migration, registrations, and invoicing provisions. Now that more than a month has passed since the roll out, taxpayers are shifting their focus to some of the more specific areas in which GST directly impacts particular industries and businesses.
How will GST deal with discounts?
Offering trade and cash discounts is a built-in promotional scheme of almost every entity. Companies generally offer trade discounts to increase sales, while cash discounts are given to recover payments speedily.
GST doesn’t differentiate between trade and cash discounts. Rather, GST segregates the discounts allowed into two categories:
- those given before or at the time of supply
- those given after the time of supply
How will discounts affect the value of supply?
- If a discount has been allowed before or at the time of supply, and it has been mentioned in the invoice separately, it will not be added in the value of supply.
For Example: A company offers a 10 percent discount on the sale of goods worth Rs. 100. If the company mentions the discount amount (i.e. Rs. 10) separately in the invoice, the value of the taxable supply will be Rs. 90 (100 – 10).
- If discount is allowed after the supply, it may or may not be added in the value of the supply, depending on the following factors:
- whether the discount can be linked directly to the relevant invoice of supply,
- whether the discount has been allowed as per the terms already agreed upon before or at the time of supply, or
- whether the input tax credit related to the amount of the discount allowed has been reversed by the recipient of the supply.
For example A company has a policy of allowing a cash discount of 10 percent if a customer pays a particular invoice within 30 days. If the company sells goods worth Rs. 100 to a customer and the customer pays the invoice within 30 days to avail the discount, the discount amount will not be added to the value of taxable supply. The customer must reverse the input tax credit on Rs. 10 (the amount of the discount allowed).
For example A company doesn’t have a policy of offering cash discounts to the customers at the time of payment, however, has supplied goods worth Rs. 100 to a customer who didn’t pay his debts. If this company now offers the customer a 10 percent discount in order to encourage the customer to clear all his debts, but the discount wasn’t agreed before or at the time of supply, and can’t be linked to a particular invoice, this discount will be added in the value of the taxable supply.
Free samples under GST
In the pharmaceutical industry, companies often provide free samples of medications and drugs to doctors, medical practitioners, government, and the public.
In the FMCG industry, promotional schemes like Buy 1 Get 1 Free are also prevalent.
Input tax credit not allowed on free samples
According to section 17(5) of the CGST Act, an input tax credit will not be available for goods given as gifts or free samples. Thus, if the taxpayer avails the input tax credit on account of a purchase of goods, and later gives these goods as free samples, the input tax credit will be reversed.
Value of free supplies
If goods are supplied free of cost, the value of the goods will be equal to the value of other goods that are of similar kind and quality. Similar goods are goods that are supplied under similar circumstances that, in respect of their characteristics, quality, quantity, functional components, materials, and reputation, are the same as, or closely or substantially resemble, each other.
Warranties to be treated as a component of composite supply
If a warranty is given with the supply of any goods or services, it shall be treated as ancillary and the entire supply will be termed as a composite supply. A composite supply will be treated the same as a supply of a principal good or service.
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