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Coronavirus discounts, bad debts may hit GST collections; businesses need to do this to cut tax risk

Coronavirus discounts, bad debts may hit GST collections; businesses need to do this to cut tax risk

The pandemic has arrested business activities across the trade and commerce, and recovery of full payments from the customers on outstanding invoices, is proving to be an uphill task. In order to manage the working capital, businesses are bound to offer some discounts to its customers for realizing timely payments. Further, in worst cases, debts will turn out to be bad, and businesses would not be able to realize any payment. Now the issue is GST is paid to the government, once the invoices are issued and commercially speaking without tax adjustment such discounts/ bad debts would be a double whammy. Let us now analyse the said issues from 360 degrees.

GST law per se makes a distinction between pre-sales discount and post-sales discount. Full adjustment of tax is available in case of pre-sales discount, whereas such adjustment is not freely available in case of a post-sales discount. One of the key conditions for reducing tax liability on account of post-sale discount is “such discount shall be established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices”.

Now the basic issue is that no one has predicted this pandemic and thereby no specific clause exists in the agreement as on the date of supply. In the case of UltraTech Cement Ltd., AAR – Maharashtra held that discount from the value of supply can be allowed only if the discount complies with the provisions of Section 15(3) of the CGST Act, 2017.

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