’Discount’, a reduction or a revision in sales price?

One important CBIC clarification that has recently come is the deduction of The claim bonus (NCB) from the value of supply for the purpose of GST levy.

It’s pertinent to note that NCB is a benefit the recipient of the insurance service is entitled to after a policy year if he had not lodged any claim for that year and the benefit is by way of a reduction in premium to be charged by the insurance company for the subsequent policy year.

As per the clarification the net value of the premium i.e. Gross premium determined by the insurance company less the NCB amount the recipient is entitled to shall be the value of the supply. The clarification considered NCB as an eligible deduction u/s 15(3) (a) of CGST. Section 15(3) is laid out below;

15(3) The value of the supply shall not include any discount which is given——

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been affected, if—

(i) such discount is established in terms of an agreement
….and

(ii) ITC as is attributable to the discount on the basis of the document issued by the supplier has been reversed…

On a plain reading, one may infer that the discount is referred to in 15(3) and the sub-clause (a) is with respect to the same supply against which the eligibility for the discount is being applied because it is then only the discount could be said to have been provided before or at the time of supply as envisaged under the said sub-clause else it would have fallen under clause (b) which deals with the cases of discount extended after the supply has been effected.

However, NCB as per the circular will fall under sub-clause (a) which inter alia would mean that the discount could relate to or be determined based on any supply, not necessarily the same supply from which it’s being deducted.

One point to note is that NCB entitlement not only is based on lodging No claim in the earlier year but also subscribe to the policy by paying a premium for the subsequent year, which is when the amount will be reduced. Also, the commercial reason behind NCB is that the insurance company passes on some margin accrued to it (out of the last premium) to the insured because the latter did not lodge any claim.

What seems to be the takeaway from the circular is that the value of a supply will be reduced by the amount the supplier had agreed to pass on to the recipient even if the same is a condition precedent to any past supplies.

I am just trying to understand the takeaway in the context of the return of expired goods in the case of pharma products by the distributor. Here also it’s a condition of an earlier supply that the loss in case of expired goods shall be made good. If that is considered as a revision of the value of future supplies, then clause (b) may somewhere lose its effect and the condition for reversal of ITC may not be relevant at all.