Discounts are very common in business. There are various types of discounts like trade discount, cash discount, quantity discounts, repeat customer discounts, end of year discounts etc. These discounts are allowed mainly to encourage customers to purchase more goods or to make early payments. It is necessary to understand the VAT impact on such discounts allowed.
Though the VAT provisions are similar at large across the states, there are variances observed with respect to the deductions allowed against sales price or gross turnover under different state vat laws. For example:-
- DVAT – Allows any discount as per practice.
- Haryana VAT – Allows cash discount or trade discount at the time of sales.
- Karnataka VAT – Allows only if explicitly effectuated through invoice.
- Kerala VAT – Allows any discount if books speak so and passed as per trade practice (as per KGST Rules).
As per Rule 3(2)(c) of Karnataka VAT Rules 2005, all amounts allowed as discount would be allowed as deduction for the purpose of computation of taxable turnover. However, the deduction is allowed subject to fulfilment of following conditions:
- Discount allowed is in accordance with the regular practice of the dealer or is in accordance with terms of any contract or agreement entered into in a particular case
- The tax invoice or bill of sale issued in respect of sales relating to such discount shows the amount allowed as discount; and
- The accounts of the dealer show that the purchaser has paid only the sum originally charged after discount.
Inconsistency in provisions till 1st April 2012
Section 30 (omitted w.e.f 1st April 2012) of KVAT Act read with Rule 31 of KVAT Rules 2005, allowed for issue of credit notes to claim reduction in tax payable which could be on account of cancellation of sale, alteration of sale value, whether due to discount or otherwise.
However, the credit was to be issued within 6 months from date of such sale.
As discussed earlier, Rule 3(2)(c) of KVAT Rules 2005 provided that the discount shall be disclosed on the face of invoice. This led to lot of confusion among the dealers if discounts could be claimed through credit notes or not, especially when the discounts are decided after issue of sales invoice.
The validity of Rule 3(2)(c) was challenged through a writ petition. The Karnataka High Court held that in case of State of Karnataka Vs. Reliance Industries Ltd held that “when credit notes are subsequently issued by the assessee, it would automatically result in lower amount of turnover which would result a lower quantum of sales tax”.
A conflicting view was also expressed by the Division Bench of High Court in case of State of Karnataka Vs. Kitchen Appliances India Limited wherein it was held that the dealer was not entitled to any relief, if discount is not shown on the face of invoice.
Later on the High Court in case of Pratham Motors Pvt Ltd vs. Addl Commissioner of Commercial Tax decided that Rule 3(2)(C) is intra-vires but does not prohibit the issuance of credit note subsequent to the sale bill. It was held that the deduction could be claimed based on the credit notes.
Southern Motors v. State of Karnataka (Southern-II)(decided on 03.04.2013) D.B. held that in ‘Reliance Industries Ltd’ and ‘Pratham Motors Pvt Ltd’ cases ‘no law was ever laid down and It was contended by the learned counsel for the assessee that once the credit note is issued, the said discount falls outside the turnover and therefore, there is no question of applying Rule 3(2)(c) would arise.
The State of Karnataka v. Samsung India Electronics Ltd. D.B. of the HC had followed the above Southern-II decision on 19 th June 2014.
Present Scenario
Section 30 with respect to issue of debit / credit notes has been omitted with effect from 1st April 2012. Therefore, now it would be difficult for the dealer to claim the deduction based on the credit notes. Dealer shall ensure that discounts are disclosed on the invoice and other conditions of Rule 3(2)(c) are strictly followed.
Discounts should be in related to specific sale invoice
The Karnataka High Court in case of Maya Appliances Private Limited Vs Commissioner of Commercial Taxes held that the tax invoice or the bill of sale should be in respect of the sales relating to such discount shown therein and only then it will be allowed as a deduction as per Rule 3(2)(c).
Therefore, the dealer would be eligible for claiming the deduction of discount amount only if such discount is related to particular sale transaction. The option of revising the return and past invoices could be examined by a dealer to claim deduction of discounts which are decided at later stages.
To summarize, none of the Judgments were overruled by larger bench and all are in force with different conclusions.
It is also note worthy that, Revenue is willing to adopt the Southern Motors/Samsung case law being the latest one and favourable one for them out of this series of Judgments. It is strange that (with utmost humility) Hon’ble HC did not refer the matter to Larger/Full Bench of HC in order to eliminate the inconsistency between “Reliance/Pratham vs. Kitchen / Southern”. We can refer to recent decision of the Apex Court in the case of (Kone Elevator India Private Limited v State of Tami Nadu and others reported at (2010) 14 SCC 788 (KoneII) which referred the matter to a Constitutional Bench after observing different opinions in different judgments of the Apex Court. It is apposite to point out that over the years larger benches have reconciled differences arising out of D.B. judgments.
Conclusion
Dealers to be careful while claiming the deductions / exemptions under the tax provisions as most of the provisions are not free from litigation. It is advisable to have the transactions reviewed [health check of tax compliances] by professionals on regular basis to ensure that the legal provisions are complied and all benefits available taken.