MARCH 26, 2019

By Akhil C Varghese, CA

IN this competitive price sensitive market, industries are developing innovative marketing strategies to gain competitive edge over its rival. These marketing strategies are an obvious deviation from the conventional marketing strategy of TV/newspaper advertisement, etc.

One such marketing strategy involves selling of goods to identified customer (read industrial consumer/ Bulk quantity purchaser) at a particular price (read at a discounted price) which would ensure high sales. Though this is one of the most lucrative/simple way to increase the sale manifold, the underlying tax implication seems to be as complicated as the quantum physics.

In this article, the author would like to analyse one marketing strategy where there can be possibility of a different kind of double taxation in GST.

'A' who is a manufacturer of goods supplies goods to its T1 distributor, X number of products for Rs. 100 per piece. The T1 distributor further supplies these X products to T2 distributor for Rs. 110 per piece. T2 distributor would normally sell the goods to its customer at Rs. 120 per piece. However, based on the tripartite agreement (type of price protection agreement) entered between A, T2 distributor and end customer, T2 distributor would sell the products to its customer at reduced price, as agreed to in the MOU, say Rs. 100 instead of Rs. 120 (normal price). In such a scenario, A would compensate its T2 distributor with the differential amount, i.e. Rs. 20 subject to submission of the necessary documents to support the claim.

Relevant Legal Provisions

Section 15(2)(e) of the CGST Act provides that the value of supply shall include subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments. As per Explanation to Section 15(2) of the CGST Act, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

The above section clearly provides that subsidy given by the Government alone is excluded from the value of supply and thus makes a requirement that any transaction where there is any form of price-intervention that behaves like a 'subsidy' is liable to be included in the value of supply.

The question which arises is whether the amount of compensation given by A to T2 distributor is a part of transaction value of T2 distributor by virtue of qualifying as a subsidy.

The word 'subsidy' has not been defined under the GST Law. Therefore, let us refer to the dictionaries for the meaning of the word 'subsidy'.

Advanced Law Lexicon of P. Ramanatha Aiyar, 3rd Edition

"Subsidy" as defined in terms of is as follows:

Subsidy. The financial aid granted by the Government to a business enterprise in order to encourage rise in production, quantity and quality wise, and also to help sell the commodity produced, at a lower price.

Sum paid by government to companies in certain industries to enable them to sell their goods or services at a price close to the prevailing market price.

Chambers Twentieth Century Dictionary, Revised Edn.

"Assistance and in money ... a grant of public money in aid of some enterprise, industry etc., or to keep down' the price of a commodity......"

'Words and Phrases, Permanent Edition, Vol. 40' where subsidy is described as follows:

"A subsidy is a grant of funds or property from a government as of the state or municipal corporation to a private person or company to assist to the establishment or support of an enterprise deemed advantageous to the public; a subvention".

The emphasis in each of the above definitions on 'subsidy' is on something given or donated by Government or a State or a municipal corporation, to a private person or company to assist in the establishment or support of an enterprise deemed advantageous to the public.

However, the above definitions are a clear contrast to the provision provided in Section 15(2)(e) of the CGST Act which provides that the value of supply shall include subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Therefore, as per GST Law, subsidy can be given not only by the Government but also persons other than Government, which includes individuals, private bodies etc.

Going by the above analysis, in view of the author, the amount given by the manufacturer i.e. A to T2 distributor for the losses suffered by him in supplying the goods at reduced price to the customer may qualify as a subsidy and, therefore, may need to be included in the value of supply of T2 distributor.

Is it agreeing to do an act?

Sl. No. 5(e) under Schedule II of CGST Act provides that 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' shall be treated as supply of services.

In the illustration given, the compensation will be given for those goods which are in the inventory of T2 distributor which they agree to sell at lower prices as proposed by manufacturer i.e. A.

By applying the above provision, the compensation received by T2 distributor shall be treated as consideration received for agreeing to do an act in the form of price drop as proposed by manufacturer. Therefore, the said activity provided by T2 distributor may also qualify as a supply of service under GST Law.

Flipside- If Subsidy under GST Law?

-  Although in terms of the above analysis, subsidy is to be included in the transaction value of T2 distributor for payment of GST to the Government, but in reality, the GST attributable to the subsidy cannot be collected from customer because the amount agreed between the parties is without the amount of subsidy.

-  GST on the amount of subsidy cannot be collected from the manufacturer also i.e., A in the instant case, since T2 distributor does not issue any tax invoice to the manufacturer.

-  Since T2 distributor cannot collect the GST on the value of subsidy due to the above reasons, they have to bear the GST Payable on the subsidy (on its own account) and treat such payment as an expense in their books of accounts.

For industries, it would be better to treat the amount received as towards the services provided rather than subsidy since treating the activity as services will solve the issues in availment of GST credit.

Conclusion

In the illustration given in this article, there is a possibility of treating the same amount as subsidy which needs to be included in the value of supply of goods and treating it as services in the form of agreeing to do an act. It needs to be noted that definition of service under GST Law means anything other than goods, therefore, in order to treat an amount as part of service it should not be part of the value attributable to goods first. However, treating the same as part of the value of goods will have issues as discussed in the para supra.

Therefore, clarification from the Government with regard to the following two aspects would be appreciated:

- Meaning of the word 'Subsidy' provided under GST Law?

- Whether a particular amount can be taxed both as supply of goods and supply of services under the GST Law?

(The author is an Associate with Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)