Taxable Value or Transaction Value

In any law, Tax has to be paid on the value which is subject to tax or the taxable value. The value which is paid or agreed to be paid by the receiver of the goods or services to the supplier of goods or services is the value on which the tax is to be levied. Such value which is considered for a tax levy is termed as ‘Consideration’ as per GST Act.

As per Section 15(2) of GST Act, Taxable or Transaction value includes,

  • Any taxes, duties, fees or other charges, if charged separately (Other than CGST, SGST & IGST)
  • Amounts paid by the recipient of goods on behalf of the Supplier
  • Interests, late fee or penalties for late payment
  • Expenses such as Commission, Packaging, Loading and Unloading expenses, and transportation which are done by the Supplier before or at the time of delivery of goods.

    • Similarly, the transaction value / taxable value or the value of a supply does not include a few items, and a Discount on goods/services is one major part.

    Under Section 15 of GST Act, 2017, The value of a supply does not include any discounts which is given either,
    1. Before or at the time of supply
    2. After the supply has been effected

Let us understand the concept of discounts as per these two categories

The suppliers give numerous kinds of discounts such as cash, trade,

quantity/volume/performance, etc are given by the suppliers. Such discounts are reduced from the taxable value / Supply value. Since the value of taxable supply is the transaction value, GST is leviable on the value after deducting the discounts.

However, not all discounts offered by the supplier to their customers are allowed as deductions from the value. Only such transactions which satisfy the conditions prescribed in Section 15(3) of the GST Act are allowed as deduction.

Discounts that are allowed as a deduction from the value are

Discounts given before or at the time of Supply

Such discounts are to be mentioned in the invoice separately. It will not be added in the value of supply. An example of such discounts can be offered for making the payment at the time of supply itself. Such discounts are recorded in the invoice and thus, GST is charged on the gross amount fewer discounts recorded in the invoice.

Example: Company offers a 10 % discount on the sale of goods worth Rs. 200. If the company mentions the discount amount (Rs. 20) separately in the invoice, the value of the taxable supply will be Rs.180 (200–20).

Discounts given post supply:

Post Supply discounts i.e. the discounts that are given after the supply is made are allowed as a deduction from the value of supply if the following conditions are satisfied.

Discount is in the terms of the agreement between the supplier and the recipient and that existed at the time of supply. That is both the Supplier and recipient had entered into an agreement where the discount is mentioned

Proportionate Input Tax Credit is reversed by the recipient. The buyer would have availed input tax credit (ITC) of the GST payable on the gross value mentioned in the invoice. Thus, a credit note is issued to him by the supplier for the discount. The buyer will reverse the credit. Consequently, the tax liability of suppliers is reduced by the same amount.

If any of the above conditions are not satisfied, the GST liability of the supplier cannot be reduced. However, the supplier can issue a commercial credit note for the value of the discount. In this case, the buyer is not required to reverse any Input Tax Credit.

The provisions related, to the allow ability of discounts as a deduction from the supply value, are mentioned in the diagram below.

Below are illustrations for each situation that gives you a clear understanding of the concepts.

When a discount is given before supply and it is known at the time of supply

ABC is a dealer of cars and sells to a customer for Rs.7,00,000 offering a 10% discount. To encourage prompt payment, ABC offers an additional discount of 5% if the customer pays within 7 days.

Here, a Discount of 10% will be mentioned in the invoice resulting in the reduction of Rs.70,000 in the net transaction value. However, a discount of 5% will not be deducted from the invoice because it is not certain as it depends upon the payment. But it can be linked to this specific invoice (In the form of a Credit note) and then the discount amount can be deducted from the transaction value.

When a discount is given after supply and it is not known at the time of supply

ABC offers a cash-back scheme where a discount of Rs.10,000 is allowed for all the cars sold in the year 2020. Discount is announced and given after the supply and not mentioned in the tax invoice. Hence, the discount value cannot be deducted from the transaction value. In this case, ITC claimed is to be reversed by the recipient, or a commercial credit note is to be issued by the supplier.

Hence, treatment of discounts can be treated as under,

Discount is given Allowed as a deduction from transaction value?
On or before the time of supply and recorded in the tax invoice Yes
After supply but it was known before or at the time of supply and can be linked to the relevant invoice Yes
Given after supply but it was not agreed upon / known before or at the time of supply (Not traceable with relevant invoice) No