Cash discount scheme for dealers: rules, day slabs and calculation

Cash discount, CD in most circulars, rewards speed of payment, not volume. The manufacturer bills on credit terms of, say, 30 days. A dealer who pays sooner saves the manufacturer working capital and credit risk, and the scheme shares part of that saving. Four things define the scheme.

• Rate form. A rupee amount per unit (per bag, per tonne, per case) or a percentage of invoice value. Per-unit rates are common in cement and other bulk goods; percentages suit mixed product ranges.
• Day slabs. The rate falls as the days to payment rise. The earliest slab carries the highest rate and the benefit is nil beyond the credit period.
• Full payment. An invoice earns cash discount only when it is fully paid, and the date of full payment decides the slab. A part payment does not earn a proportionate discount unless the circular says so.
• Matching rule. Dealers usually pay round sums on account, not invoice by invoice. The scheme needs a rule for applying money to invoices, and the standard one is first in, first out: the oldest unpaid invoice is cleared first.

An illustrative per-unit slab sheet for a cement dealer on 30 days credit:

A percentage version would read 2 percent, 1.25 percent and 0.5 percent of invoice value for the same slabs. In either form, define how days are counted. The usual convention, used here, is the number of days between the invoice date and the date funds are received, so an invoice dated 5 June and paid on 20 June is paid in 15 days. If the invoice date itself is counted as day one, the same payment is on day 16 and falls into the next slab. The circular must pick one.

If a dealer could choose which invoice a payment clears, he would always apply it to the newest invoice, collect the top slab on it and leave old invoices open. FIFO removes that choice: every rupee received goes to the oldest outstanding invoice, and only the balance moves to the next. It matches how the receivables ledger ages, and it gives one answer that both sides can reproduce. Some brands allow invoice-specific payment when the dealer quotes the invoice number in the remittance. That is workable, but it should be the stated exception, and FIFO should be the default for everything else.

The figures are illustrative. A dealer buys cement at ₹350 a bag, total invoice value, and receives three invoices in June.

He makes two on-account payments: ₹2,00,000 on 6 June and ₹2,20,000 on 20 June. Applying each payment to the oldest unpaid invoice first:

The first payment clears INV-1 (₹1,40,000) and leaves ₹60,000, which goes to INV-2. INV-2 still has ₹1,05,000 - ₹60,000 = ₹45,000 open, so it has not earned anything yet. The second payment first closes that ₹45,000 and the remaining ₹2,20,000 - ₹45,000 = ₹1,75,000 clears INV-3 exactly. Now count the days and apply the slab.

The dealer earns ₹7,200 on 1,200 bags, an average of ₹6 a bag. Two details in this example are where disputes start.

First, INV-2. The dealer paid ₹60,000 against it within one day of billing and may feel that most of the invoice was paid early. Under the full-payment rule the whole invoice takes the slab of the day it was closed. Had his first payment been ₹2,45,000 instead of ₹2,00,000, INV-2 would have been fully paid on 6 June, one day after billing, and earned 300 x ₹8 = ₹2,400 instead of ₹1,500. Being ₹45,000 short cost him ₹900.

Second, the boundary. INV-2 was closed in exactly 15 days and sits on the edge of the ₹5 slab. Under a convention that counts the invoice date as day one, it would be day 16, the rate would be ₹2 and the discount ₹600. A dealer and an accounts executive using different conventions will both be sure they are right.

In this slab sheet, paying by day 7 instead of day 30 earns ₹8 instead of ₹2, a gain of ₹6 a bag on a ₹350 bag. That is about 1.7 percent for paying 23 days sooner, which works out to roughly 27 percent a year on a simple annualised basis (1.71 percent x 365 / 23). A dealer whose borrowing costs less than that should pay early every time, and one who understands this usually does. The same number is the manufacturer's cost of buying those 23 days, so it should be compared with the company's own cost of funds and the credit risk being removed. A cash discount priced far above the cost of funds is a price reduction by another name. It also stacks on top of the volume scheme, so read it together with the slab sheet when working out the dealer's total rate.

Cash discount is normally calculated after the month closes, invoice by invoice, and settled by a credit note to the dealer's account, which reduces what he owes on later invoices. Some brands settle monthly, some quarterly. Three operating rules are worth stating. Returns: if bags on an invoice are returned, the discount is recalculated on the net quantity. Cheque dishonour: a payment that bounces is treated as not received, and the invoice's paid date moves to the date of the replacement funds. Date of payment: the date funds are credited, not the date written on the cheque or the date the dealer sent a screenshot.

A statement that shows each invoice, the payments applied to it, the date it closed, the days counted and the slab is what prevents the monthly phone call. The rebate claims process covers dispute handling more generally.

This is a statement of principle, not tax advice. Under Section 15(3) of the CGST Act, a discount reduces the taxable value of a supply if it is shown on the invoice at the time of supply. A discount given after supply can reduce the taxable value only if it was established by an agreement entered into at or before the time of supply, is linked to the relevant invoices, and the recipient reverses the input tax credit attributable to it. A cash discount scheme announced before billing and settled against identified invoices may be structured to meet these conditions through a GST credit note. Many companies instead issue a commercial or financial credit note with no GST adjustment. Which route applies depends on your scheme wording and documentation, so confirm it with your advisor. The GST guide for trade schemes sets out the positions in more detail.

Cash discount is harder to calculate by hand than a volume scheme because it needs two feeds, invoices and receipts, and a matching step between them. In a spreadsheet the matching is usually done once at month end, and the dealer sees none of it. A dealer scheme engine applies the FIFO rule the same way every time, recalculates when a receipt or a return arrives, and can show the dealer which invoices are open and what each will earn if cleared by a given date. Unotag takes invoices through ERP integration with SAP or Tally or by Excel upload, shows the dealer the invoices counted for each scheme, and produces the settlement as a credit-note file. For how cash discount sits beside volume and growth schemes, see types of dealer schemes, and for the arithmetic of those, how to calculate a dealer scheme payout. The dealer scheme engine page describes the product.