Circular No. 105/24/2019-GST-Dated 28th June 2019-Key Takeaways on Post- Sale Discount from the Perspective of Supplier, Dealer and the Customer
CA Arpit Haldia
CBIC has issued Circular 105/24/2019-GST on treatment of Post Sale Discount under GST Regime. The matter has long been under Litigation and seems that its not any different in GST Regime. However, the good thing is that effort has been made to bring clarity on the issue for one and all and issues have sought to been narrowed down.
There are three persons referred to in the Circular i.e.
- Supplier-Original Supplier of the Supply
- Dealer- One who receives the goods from the supplier to sale the goods to the customer
- Customer- One who purchases the goods form the dealer
This article tries to highlight the key takeaways from the Circular and its impact. One of the key takeaways from Circular is “Nomenclature does not matter but what matters is the nature and activity for what it has been given.”
Para 2 of the Circular provides:
It would be important to examine whether the additional discount is given by the supplier of goods in lieu of consideration for any additional activity / promotional campaign to be undertaken by the dealer.
If an amount has been received by the dealer for conducting any activity or promotional campaign for the supplier i.e. sales promotion camp etc. then even though it might be termed/received as a discount, it would be treated as a consideration for an activity.
- Post-Sale Discount related to original supply without any further obligation or action required at the dealer’s end would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act-Para 3
Para 3 of the Circular provides that
It is clarified that if the post-sale discount is given by the supplier of goods to the dealer without any further obligation or action required at the dealer’s end, then the post sales discount given by the said supplier will be related to the original supply of goods and it would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act.
Post-Sale Discount would not be included in the value of supply in the hands of the supplier, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act.
Example: A has entered into an agreement with B for supply of Sugar candy. The agreement provides that if B would make an offtake of 2000 sugar candy in one month, he would provide an offtake discount of 2% on entire off take made by B during the month. B makes an offtake of 2500 sugar candy during the month. Discount passed by Supplier would be eligible to be excluded from the value of Supply by virtue of Provisions of Section 15(3).
Treatment of Discount from the perspective of the Dealer is divided into following parts:
- Post Sales Discount for carrying out additional activity
- Additional Discount given by supplier of goods to dealer to offer a special reduced price to the customer
- Post-Sale Discount in relation to a supply not permitted to be excluded from the value of supply in the hands of the said supplier on account of not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act
- Post-Sale Discount for carrying out additional activity taxable in the hands of dealer-Para 3
Para 3 of the Circular provides that
if the additional discount given by the supplier of goods to the dealer is the post-sale incentive requiring the dealer to do some act like undertaking special sales drive, advertisement campaign, exhibition etc., then such transaction would be a separate transaction and the additional discount will be the consideration for undertaking such activity and therefore would be in relation to supply of service by dealer to the supplier of goods. The dealer, being supplier of services, would be required to charge applicable GST on the value of such additional discount and the supplier of goods, being recipient of services, will be eligible to claim input tax credit (hereinafter referred to as the “ITC”) of the GST so charged by the dealer.
This, is one of the most critical part of the Circular. It holds that if additional discount requires the recipient of the discount to do any additional activity for the supplier, then in such case, it would be treated as consideration for carrying out such activity and therefore would be in relation to supply of service to the dealer to the Supplier. Some of the examples are special sales drive, advertisement campaign, exhibition etc. The treatment of post sales retail target incentive received by the dealer would also be in question and would also fall under the purview of this clause.
- Additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume -Para 4
An example of the said situation could be Distributor “A Ltd.” has announced a scheme wherein “B Ltd.” sold goods worth Rs 5500/- at a discount of Rs 500/- to C and discount of Rs 500/- given to “C” would be reimbursed to “B Ltd.” by “A Ltd.”. “B Ltd” in the above scenario would be receiving Rs 5500 i.e. Rs 5000/- from “C” and Rs 500 from “A Ltd”.
Para 4 of the Circular provides that
“Additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer. This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer, for the purpose of arriving value of supply, in the hands of the dealer, under section 15 of the CGST Act.”
The key distinction sought to be brought between Para 4 and Para 5 of the Circular (as Discussed afterwards) is whether additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume. If yes then Para 4 and if no the Para 5.
The situation would be complicated one and could entail litigation wherein discounts and incentives are given as lumpsum amount and without link to an invoice say in the name of Special Incentive etc. The circular is not clear about that situation and it would be a litigation between the department and the taxpayer wherein every such lumpsum discount would be seen by the revenue as a tool having an impact on reduction of selling price and by the taxpayer as a post-sale discount not linked to reduction of selling price. Therefore, every credit entry in the Profit and Loss account for a lump such discount of such nature would be a trigger for litigation.
- Treatment of ITC in the hands of dealer on Post-sales discount granted by the supplier of goods which is not permitted to be excluded from the value of supply in the hands of the said supplier on account of not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act-No ITC to be reversed-Para 5
Para 5 of the Circular provides that
It is clarified that dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.
Circular clarifies that No ITC would have to be reversed on post sales discounts excluded from the value of supply in the hands of the said supplier on account of such discount not being in accordance with the provisions contained in sub-section (3) of section 15 of CGST Act.
- Eligibility of customer to claim ITC of tax charged by the dealer on additional discount given by the supplier of goods to the dealer to offer a special reduced price to the customer-Para 4
Para 4 of the Circular provides that
The customer, if registered, would be eligible to claim ITC of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer in view of second proviso to sub-section (2) of section 16 of the CGST Act.
Taking the Example as given above, “C” would only be eligible to claim ITC in respect of Rs 5000 and he would not be eligible to claim ITC on Rs 500/- which have been paid to “B Ltd” by “A Ltd”. This treatment needs reconsideration as nobody would be able to take credit on tax paid on Rs 500/-. “C” would not be able to take credit since circular restricts him from doing so. “A Ltd” cannot take credit since Invoice would be in the name of “C”. Further settling of consideration partly by way of discount and partly by way of money/kind is an acceptable mode.
It is unjust enrichment on part of the government. Does the government intend that the customer to check books of dealer to verify whether or not dealer has been reimbursed the amount to the extent discount has been passed onto him by the dealer? Either ways it’s a clear-cut case of entering into shoes of the business, denying legible right to customer and a case of unjust enrichment on part of the Government.
Comment: On the whole a welcome step which might narrow down the litigation but ambiguity still persists. Litigation and Taxation goes Hand in Hand…
Our Articles on the treatment of Discount as published earlier (Based on Circulars and Law updated till that date) are as below:
July 27, 2018-Discount passed onto the Recipient: Treatment from Supplier perspective in GST- https://gst-online.com/discount-passed-onto-the-recipient-treatment-from-supplier-perspective-in-gst/
August 4, 2018-Treatment of Discounts from the perspective of recipient and analysis of Section 15(2)(e) of CGST Act, 2017-Part I- https://gst-online.com/treatment-of-discounts-from-the-perspective-of-recipient-and-analysis-of-section-152e-of-cgst-act-2017-part-i/
August 6, 2018-Treatment of Discounts on offtake from the perspective of recipient in GST-Part II- https://gst-online.com/treatment-of-discounts-on-offtake-from-the-perspective-of-recipient-in-gst-part-ii/