Whether the recipient can avail full ITC of the GST charged on the supply by the supplier or proportionate reversal of the same is required in case of post-purchase discount given by the supplier?

PJ/Case Law/2018-2019/3536

Name-M/s. MRF Limited (GST AAR Tamilnadu)
Citation- Order No. 5/AAR/2019 dated 22.01.2019
Issue- Whether the recipient can avail full ITC of the GST charged on the supply by the supplier or proportionate reversal of the same is required in case of post-purchase discount given by the supplier?
Brief Facts- MRF Ltd. (Applicant) intends to enter into an arrangement for setting up an interactive data exchange system between the buyer (being the applicant itself) and supplier of goods and services.
The reports generated by the system provide guidance to the applicant, to decide which invoices are eligible for discounts on early payment.

Submissions by Applicant-GST is paid by the supplier on the entire price of the goods without considering the discount. Recipient will pay the discounted price along with GST on the original price to the supplier. The Applicant states that the payment made by the recipient has to be construed as proper payment in compliance with Section 16(2) though there is an actual lower payment to the extent of discount. This is because the discount is not allowed as deduction for the purpose of payment of GST since the required conditions are not satisfied. There is no requirement to reverse ITC by the recipient attributable to the amount of discount so allowed for the reason that such discount is not considered by the supply for payment of GST and he is not entitled to issue any credit note for the discount amount including GST in terms of Section 34(1) and (2). Any post supply arrangement resulting in reduction in price should not alter the payment of GST by the supplier and the respective availment of ITC by the recipient. Any requirement of insistence for reversal of credit on the discount portion at the hands of the recipient is not warranted.

Contentions by Department-By virtue of section 15(3) of the Central Goods and Services Tax Act (CGST), discounts which do not form a part of the purchase contracts are not allowed as deduction from the original price of the goods and accordingly suppliers are liable to pay tax on the full value of supply i.e. before such discount.

Further for the purpose of availing ITC, section 16(2) of the CGST Act, requires the recipient to pay to the supplier, the amount towards the value of supply along with the tax payable thereon within a period of one hundred eighty days from the date of issue of invoice.

Decision-In the instant case, the value of supply is the full undiscounted value indicated in the tax invoice on which the supplier would pay GST and the applicant makes payment only to the extent of the invoice value less the discount. Thus the applicant can avail only proportionate ITC i.e. credit attributable to invoice value less the discounts.

Comments-Whilst, recently, CBIC had issued a clarification where it had recognized issuance of financial/commercial credit notes for carrying out commercial transaction between contracting parties, the instant AAR limits the credit to the recipient, which may not be in line with the intent considering that full amount of tax has been deposited in the Government treasury.
The second proviso to sub-section (2) of Section 16 links the availability of ITC with the payment duration in respect of supply of goods or services between the vendor and the customer. The proviso aims to restrict the input tax credit of inward supplies received by a taxpayer if the value of such inward supplies along with tax is not made to the vendor within a period of 180 days from the date of the invoice. This move, which is reminiscent of the Rule 4(7) of the CENVAT Credit Rules, 2004, can be assumed to be inserted to safeguard the interest of the vendor by ensuring that he receives payment from the customer within 180 days. However, it is imperative to note here that the value of supply has been defined under section 15 of the Central goods and Service tax Act. The two sections are being introduced with their own objective. Therefore,the government should consider issuing an explicit clarification on the said issue to avoid any unwarranted and prolonged litigation on this aspect

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PJ/Case Law/2018-2019/3536

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