Discount and Incentive-Circular No. 105/2019-GST Dated 28th June 2019-Agenda to 37th GST Council Meeting gives an understanding to the reason behind withdrawal of Circular and how it gives a brief overview of what’s coming next in place of withdrawn Circular
CA Arpit Haldia
Circular No. 105/2019-GST Dated 28th June 2019 which provided clarification regarding treatment of Secondary or Post Sales Discounts was withdrawn as per the decision of 37th GST Council Meeting and vide Circular No. 112/2019-GST Dated 3rd October 2019. Concerns were raised by the Industry against the clarifications stated in Circular No. 105/2019-GST. Therefore, 37th GST Council Meeting not only decided to withdraw the Circular but also refer the matter to Law Committee. The relevant Extract of GST Council Meeting is as follows:
Agenda Item 22(iv): Doubts raised on treatment of secondarv or post-sales discounts under GST
Introducing the agenda item, the Co-Convenor of the Law Committee stated that Circular Nos. 9211112019-GST dated 07.03.2019 and 105/24/2019-GST dated 28.06.2019 were issu·ed to clarify issues related to treatment of sales promotion schemes under GST. He informed that several representations were received from consumer durable manufacturers and automobile associations with reference to paragraphs 3 and 4 of the Circular 105/24/2019- GST dated 28.06.2019 regarding its implication. Therefore, the issue was deliberated by the Law Committee. The Law Committee felt that the whole issue required a holistic examination and recommended to withdraw Circular No.105/24/2019-GST dated 28.06.2019 ab-initio.
Accordingly, the Council agreed to the proposal of the Law Committee. 72. For Agenda item 22(iv), the Council approved to withdraw Circular No.I 05/24/2019- GST dated 28.06.20 19 ab-initio.
However, Agenda Item 22(iv) of 37th GST Council Meeting throws significant light upon the issue and gives a precursor of what’s in store in the coming future. Detailed Agenda Note for the 37th GST Council Meeting provides reason for withdrawal of the Circular and its possible solution.
- Concerns by the Industry:
Para 2 of the Agenda Item 22(iv): to the GST Council Minutes referred to the Concerns of the Industry:
“Numerous representations have been received in this regard from retailers, Consumer Durable suppliers and Automobile associations expressing apprehensions on the implications of Para 3 and 4 of Circular No. 105/24/2019-GST dated 28.06.2019. It has been represented that undertaking special sales drive, advertisement campaign, exhibition etc.by the dealer on directions of the supplier is a very wide term and may lead to disputes. Also it has been interpreted that the prescription that the value of supply from the dealer to the customer in cases of special sales promotion discount shall include the discount offered by the principal supplier (OEM) to the dealer would lead to a surge in price of the discounted product being sold from the dealer to the customers, thus taking away the promotional aspect of such a scheme meant to attract the potential customer. It has been informed that in during the festive season, in a sluggish economy and in the end of accounting year, such discounts are a norm in the retail sector and automobile industry and that the clarification vide circular dated 28.06.2019 needs to be revisited.”
Emphasis Supplied
- Para 3 of Circular 105/2019-GST Dated 28th June 2019
a) What Para 3 of the Circular Stated:
“3. 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 Circular No. 105/24/2019-GST Page 2 of 3 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. However, 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.
b) Why was it Challenged by Industry?
Relevant Para 4.1 and 4.2 of Agenda Item 22(iv) to 37th GST Council which stated the reason for Challenging Para 3 of Circular 105/2019-GST is as follows:
4.1. As regards para 3 of the Circular dated 28.06.2019, it has been represented that it is not clear to whether post-sale discount linked only with purchases made by a dealer from supplier of goods pass the test of expression ‘without any further obligation or action required at the dealer’s end’ or even the post-sale discount schemes linked to or contingent upon the quantity of actual secondary sales of the dealer to retailer will be covered by the said expression. It has been submitted that post purchasing goods from the supplier, existence of redistribution of goods is contractual obligation of the dealer and the redistribution margin in the hands of dealer is being subjected to GST with characterization of goods. It has been argued re-distribution involves many activities attached to it and augmentation of sales volume is inherently connected to the activity of the re-distributors primary role as a trade intermediary. It has been requested that Government should explain the true contours of the above expression used in the circular with the help of couple of illustrations in order to give complete clarity on the issue.
4.2. Further it has been submitted that it is not clear as to what all activities at dealer’s end will be construed as separate transaction of ‘service’ between the dealer and supplier of goods and that the examples of undertaking special sales drive and advertisement campaign are very vague leading to further ambiguity in the matter, as supplier of goods extends discount to a dealer for achieving certain quantity targets of sales by dealer to retailers in market during a specified period. If there is no such stipulation or mandate for dealer to undertake certain activities, but as a regular business practice, dealer in order to become eligible for such discounts undertakes specific measures in the market through special efforts of its sales team in order to augment its own revenue/sales. It has been submitted that the condition to perform a service, is distinct from condition to achieve higher sales turnover, that too involving transactions on P to P basis. It has been argued that in a sales scenario, enhanced discounts are issued to achieve higher sales turnover, which does benefit both the distributor and manufacturer and that one can’t be a service provider and also a beneficiary of service. Will every sales augmentation effort on the part of dealer entitling him for post sales discount qualify as separate transaction of ‘service’ in the hands of dealer when dealer in the normal course even in the absence of any discount scheme extended by supplier of goods undertakes such sales efforts in order to maximize its profitability? It has been requested that the Government should explain the true contours of this clarification with the help of couple of illustrations in order to give complete clarity on the issue. For example, if dealer gives special financial incentives/bonus to its own sales team to motivate them to put sincere efforts in achieving best sales in the market, which in turn enables the dealer to qualify for discounts extended by supplier of goods, what would be the treatment of such discounts.
Emphasis Supplied
It can be observed from the above that clarification was sought by Industry on Schemes issued by them to their dealers for augmenting higher sales volume and more specifically known as incentive given to the dealers by the suppliers on sales made by them. It has been argued that in a sales scenario, enhanced discounts are issued to achieve higher sales turnover, which does benefit both the distributor and manufacturer and that one can’t be a service provider and also a beneficiary of service.
c) Proposed Clarification in this regard
Para 4.3 of the Agenda of Agenda Item 22(iv) to the 37th Council Meeting then clarified
In this regard, it is proposed to clarify that If a post sales discount in form of a credit note is passed on compensating the dealer for undertaking an advertisement campaign, free gifts given along with the principal supply, exchange bonus and the like activities on the directions of the principal supplier where the dealer may or may not have also contributed, the same would be treated as a consideration for the promotional activities (referred to as ‘business auxiliary services’ in the Service Tax regime) provided by the dealer to the principal supplier and chargeable to tax separately and the principal supplier would be eligible to avail ITC of the same. Any quantity discount known at the time of supply but which are linked to volume of supplies in specified period arrived at after the supplies have been made, aren’t covered as a consideration for undertaking sales promotion activities and eligible for tax adjustment as provided in Section 15(3)(b) of the CGST Act ,2017. The tax treatment of such a discount would remain the same even if the dealer undertakes a promotional activity to achieve the requisite sales volumes, the same being on his own account and not being on the directions of the principal supplier.
Therefore, it was proposed to be clarified that post sales discount in form of a credit note is passed on compensating the dealer for undertaking an advertisement campaign, free gifts given along with the principal supply, exchange bonus and the like activities on the directions of the principal supplier where the dealer may or may not have also contributed would be treated as supply. These services were commonly known as “Business Auxiliary Services” in Service Tax Regime. However, any quantity discount known at the time of supply but which are linked to volume of supplies in specified period arrived at after the supplies have been made, aren’t covered as a consideration for undertaking sales promotion activities and eligible for tax adjustment as provided in Section 15(3)(b) of the CGST Act ,2017. The tax treatment of such a discount would remain the same even if the dealer undertakes a promotional activity to achieve the requisite sales volumes, the same being on his own account and not being on the directions of the principal supplier.
- Para 4 of Circular 105/2019-GST Dated 28th June 2019
a) What Para 4 of the Circular Stated:
- It is further clarified that if the 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 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.
b) Why was it Challenged by Industry?
The relevant Para 5.1 of the Agenda Item 22(iv) of 37th GST Council Meeting which highlighted the impact of above stated Para 4 is reproduced as follows:
- As regards the provisions of para 4 of the Circular dated 28.06.2019, various scenarios have been examined and are tabulated below- A (OEM) sells say a car to B (dealer) at Rs. 5,00,000 which is further sold to C (customer) at 10% markup. The tax rate has been considered as 30%:-
Normal Supply:
| A | B | C | |
| Value | 5,00,000 | 5,00,000 | 5,50,000 |
| Tax Paid | 150,000 | 165,000 | |
| Tax collected | 150,000 | 165,000 | |
| Credit availed | 150,000 | ||
| Profit | 50,000 | ||
| Net Received | 500,000 | 50,000 | (-) 7,15,000 |
Sales Promotion Scenario
| Assuming a 10% discount offered by the principal supplier to dealer for offering the same to the final customer of that car. Without the application of the Circular dated 28.06.2019, the following will be the calculations: – | A | B | C |
| Value | 5,00,000 | 4,50,000 | 5,00,000 |
| Discount offered | 50,000 (10%) | ||
| Value for the purpose of taxation | 5,00,000 | 5,00,000 | |
| Tax Paid | 1,50,000 | 1,50,000 | |
| Tax collected | 150,000 | 1,50,000 | |
| Credit availed | 1,50,000 | ||
| Profit | 50,000 | ||
| Net Received | 4,50,000 | 50,000 | (-) 6,50,000 |
- If the Circular dated 28.06.2019 is applied, the following will be the calculations: –
| A | B | C | |
| Value | 500,000 | 4,50,000 | 5,00,000 |
| Discount offered | 50,000 (10%) | ||
| Value for the purpose of taxation | 500,000 | 5,50,000 | |
| Tax Paid | 150,000 | 1,65,000 | |
| Tax collected (customer agrees to pay tax on higher value) | 150,000 | 1,65,000 | |
| Tax collected (customer doesn’t agree to pay tax on higher value) | 1,50,000 +
15000 (borne by the dealer) |
||
| Credit availed | 150,000 | ||
| Profit | 35,000 | ||
| Net Received | 4,50,000 | 35,000 | (-) 6,65,000 |
Therefore, due to the circular the cost of the car to the dealer increased by Rs. 15,000 due to additional tax burden on the post-sales discount offered to the dealer by the OEM (discount of Rs. 50,000).
The para covered cases dealer is asked by the supplier to sell the goods at lower price and in turn the difference is compensated by the supplier. Therefore, whether the said compensation was to be held to be amount paid as consideration towards sale or as a reduction from the purchase price.
c) Proposed Clarification:
Relevant Para 5.2 of the Agenda Item 22(iv) of 37th GST Council Meeting which sought to clarify the issue:
5.2 The underlying principle of the clarification in para 4 of circular dated 28.06.2019 appears to be that the reimbursement or payment for supplies of goods or services from anyone other than the customer is still part of the consideration for the supply to the customer in view of the definition of ‘consideration’ in Section 2(31) of the CGST Act, 2017 being the payment for the inducement of the supply by ‘any other person’. Now the issue in dispute is whether ‘any other person’ includes a person in the original supply chain also i.e. the principal supplier in this example or does it mean any other person not connected with this supply chain. For example, if a real estate developer issues a voucher to every home buyer which is redeemable at car dealership for Rs. 50,000 discount in value of car, then there is no doubt that the car is being supplied for Rs. 5,50000 only but the customer is paying only Rs. 5,00,000 and Rs. 50,000 is being paid by another person. In this scenario the taxable value shall be Rs. 5,50,000 only. However, when the principal supplier issues a credit note to the dealer, such a supplier is in effect reducing the value of supply received by the dealer though without any tax adjustment in view of restriction under Section 15(3)(b) of the CGST Act, 2017. It appears that the clarification dated 28.06.2019 deeming such a discount also as a consideration for final consumption without allowing any tax adjustment for the primary supply needs to be revised.
5.3. Further, in terms of sub-section (1) of section 15 of the CGST Act when the supplier of the goods and the recipient are not related and price is the sole consideration for the supply, the value of the supply of goods shall be the transaction value, which is the price actually paid or payable for the said supply.
Emphasis Supplied
The above proposed clarification provided that when the principal supplier issues a credit note to the dealer, such a supplier is in effect reducing the value of supply received by the dealer though without any tax adjustment in view of restriction under Section 15(3)(b) of the CGST Act, 2017. It appears that the clarification dated 28.06.2019 deeming such a discount also as a consideration for final consumption without allowing any tax adjustment for the primary supply needs to be revised. The clarification was based on the definition of consideration as provided in Section 2(31) which provides as follows:
(31) “consideration” in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Emphasis Supplied
The condition that consideration has to be paid by “recipient or by any other person” forms the basic reason for issuance of the clarification i.e. whether amount paid by the original supplier to the dealer can be treated as consideration paid by “any other person”. The proposed clarification sought to hold that when the amount is paid by the original supplier then it would not fall in the clutches of “any other person”. However if the amount is paid by person other than the original supplier, then it would be falling within the ambit of “any other person” and therefore would be consideration for the said transaction.
- What was then finally provided in the Agenda Item 22(iv) of 37th GST Council Meeting for Para 3 and Para 4 of Circular No. 105/2019-GST Dated 28th June 2019
- There is possibility that field officers may have initiated actions based on interpretation in para 3 and 4 of Circular No. 105/24/2019-GST dated 28.06.2019. This would adversely affect the taxpayers and retail sectors as explained in above paras and the same requires corrective action and clarification. The Law Committee in its meeting held on 13th September, 2019 has deliberated on the issue along with the proposed Circular (enclosed as Annexure). Law Committee recommended that the whole issue requires holistic examination, and Circular No. 105/24/2019-GST dated 28.06.2019 may be rescinded. Accordingly, it is proposed to rescind Circular No. 105/24/2019-GST dated 28.06.2019, ab-initio.
- Accordingly, the matter is placed before the GST Council for further deliberation.
- Conclusion
The view coming out of agenda seems to be that post sales discount in form of a credit note is passed on compensating the dealer for undertaking an advertisement campaign, free gifts given along with the principal supply, exchange bonus and the like activities on the directions of the principal supplier would be falling within the ambit of supply. Secondly, if additional discount is given by supplier of goods to dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would not represent consideration flowing from supplier of goods to dealer for supply made by dealer to the customer.
Although circular proposed in the Agenda was not accepted by Council and matter was again referred to the Law Committee for “holistic Examination” but agenda to Council Minutes gives a sneak peak to the thought process behind withdrawal of Circular No. 105/2019-GST and what was not proper in the Circular and what might be coming in the near future.
Legal Assistance for Taxpayers.
