GST is generally added after a discount is applied to the selling price. The tax is calculated on the net transaction value (the discounted price) rather than the original price. This means the discount reduces the base amount on which GST is charged.
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.
GST is chargeable on the net price after the prompt payment discount (i.e. 90% of the selling price excluding GST). For this transaction, you should report your value of standard-rated supplies (Box 1) as $100 and your output tax (Box 6) as $6.30.
Discounts and Their GST Impact
For example, if you sell a product for $220 including GST, and you offer a 10% discount, the new price becomes $198. The GST component of that sale is now $18, not $20. This is because GST is calculated on the final price after the discount has been applied.
Because discounts are generally offered directly by the retailer and reduce the amount of the sales price and the cash received by the retailer, the sales tax applies to the price after the discount is applied.
Treatment of Post-sale Discount under GST
Section 15(3) of the CGST Act 2017 specifies that a discount can be given before, after or during the time of supply. A discount, given before or during the time of supply, must be recorded in the invoice to reduce the value of the supply.
Sales Tax Calculation: Sales tax should be calculated on the net amount after the discount, not the gross amount. For example, if the pre-discount invoice is $1,000 and the sales tax rate is 5%, the sales tax on the net amount ($980) would be $49, not $50.
GST is applied on the discounted price if the discount is mentioned in the invoice. To calculate GST on a discount, subtract the discount amount from the selling price and apply the GST rate to the reduced value.
For basic discounts (for example, a 20% off discount), charge VAT on the discounted price.
Purchase discounts are given to you by both manufacturers and wholesalers and are based on the amount of your prior or future purchases. These discounts are not included in your total taxable sales because they are based on the number of products you purchase, not the number of products sold.
Setting Retail Prices
If you want to add a 40% markup before GST, first calculate the new price: $500 plus 40% of $500, which is $700. Then, to add GST, multiply $700 by 1.1, giving you a GST-inclusive price of $770.
With GST regime, there will only be one such law, as GST will subsume various indirect taxes. The previous tax regime had separate rates, such as, Excise @ 12.36 % and Service Tax @ 14%. With GST, there is only one CGST rate and a uniform rate of SGST across all states.
GST is applied to the discounted price, not the MRP, ensuring fair taxation. Post-sale discounts must meet specific criteria to avoid GST charges. Calculating MRP involves adding base price, additional costs, and GST. Consumers can report overcharging to consumer protection authorities if retailers exceed the MRP.
The rule: If a supplier issues a post-sale discount using a financial/commercial credit note (which does not alter the GST on the original invoice), the recipient is entitled to keep the full ITC they initially claimed. Actionable step: When you receive a post-sale discount from a supplier, check the credit note.
If you're registered for GST, you should always include GST in the price of your sale (or get caught out by the ATO). If you register for GST partway through the year, you start charging GST from then on – you don't have to back pay.
On your invoice, add a separate line for the discount. Label it clearly, such as “Discount – 10%” or “Early Payment Discount.” Show the original price of the product or service. This helps the customer see the value of the discount.
If you offer an early-payment discount on credit sales, charge the GST/HST on the full invoice amount even if your customer takes the discount. When you invoice an amount that is already net of the early payment discount, charge the GST/HST on the invoiced amount.
The rules for this are simple: If the VAT on any transaction comes to less than 0.5 of one penny, it should be rounded down. If the VAT comes to 0.5 of one penny or more, it should be rounded up.
Discounts After Tax: Discounts are subtracted from the sales price after tax is calculated.
A nontaxable discount is applied after sales tax. A taxable discount is applied before sales tax. Both taxes are prorated among the items they apply to.
You can quickly work out the cost of a product excluding GST by dividing the price of the product including GST by 11. This will give you the amount of GST applied to the product. You then multiply that figure by 10 to calculate the value of the product excluding GST.
Discounts that are given before or at the time of sale can be deducted from transaction value at the time of sale; no GST will be levied on the same. However, such discounts shall be mentioned on the GST tax invoice (GST sales invoice).
HMRC recommends that we include the discounted price, the VAT on the discounted price and the total amount due if the prompt payment discount is taken up.
Both the cash flows and the discount rate should be prepared on a pre-tax basis (but see practical guidance below).
In California, “there is no taxable sale until the full purchase price is paid, unless the parties agree that title will pass at an earlier date.”