Post Supply Discounts under GST - Oh My Dealer !
JULY 04, 2019
By Shashank Shekhar Gupta, Marg Tax Advisors
A recent clarification has been issued vide Circular no. 105/24/2019-GST dated June 28, 2019 aiming to clarify tax treatment of secondary or post sales discount under Goods and Services Tax regime.
The article discusses the applicable statutory provisions w.r.t post supply discounts, clarification issued vide the said circular and its possible impact on practical business scenarios.
Statutory Provision pertaining to post supply discount under Central Goods and Services Tax Act, 2017 ('CGST Act')
Section 15(3)(b) of CGST Act provides as follows:
'(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 effected, if-
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
…'
The above provides that value of supply shall not include any discount which has been extended even after the supply has been put to effect, subject to the following conditions:
(a) There is a pre-existing agreement with respect to such discounts
(b) Specific linkage with relevant invoices is available; and
(b) Proportionate Input Tax Credit ('ITC') is reversed by the recipient
The said procedure is to be put to effect through issuance of credit note by the supplier to the recipient. Issuance of credit notes is provided through section 34 of CGST Act read with rule 53 of Central Goods and Services Tax Rules, 2017 ('CGST Rules').
Comments:
In as much as the post supply discount adjustment is sought to be claimed by the supplier, the same can be claimed basis the above provisions. The clarification issued by the circular is to clarify aspects relating to taxability/ valuation of post supply discount related transactions. The intent of the circular does not appear to impose additional/ over-riding conditions w.r.t post supply discount which are not provided through substantive law.
Vide the said circular following three instances have been taken up for discussion i.e.:
Case 1: Post supply discount without any further obligation or action required by the dealer
Case 2: Post supply discount requiring dealer to undertake special sales drive, advertisement campaign, exhibition etc.
Case 3: Post supply discount to offer a special reduced price by the dealer to the customer to augment sales volume
Case wise clarification issued by the said circular in detail:
Case 1: Post supply discount without any further obligation or action required
Clarified:
- Discounts not to be included in the value of supply.
- Proportionate tax liability adjustment can be claimed (subject to fulfillment of conditions specified vide Section 15(3)(b) discussed supra).
Comments:
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From departmental perspective, it is likely that the said case may become the gold standard for post supply discounts. Though practically it may arise in limited cases only. Such as revaluation post supply i.e. any cost adjustments identified later.
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Case 2: Post supply discount requiring dealer to undertake special sales drive, advertisement campaign, exhibition etc.
Clarified:
- Undertaking such efforts would constitute a separate transaction i.e. supply of services.
- The dealer being supplier of services and amount of additional discount being the consideration for such supply.
- The dealer is required to issue invoice and charge the applicable GST.
- The recipient (manufacturer/ wholesaler) is entitled to avail ITC for such GST.
Comments:
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This adds to the woes of the dealer specially for cases wherein post supply discount/ credit notes are being considered as an omnipotent tool to govern supplier-dealer relationship. If the dealer has undertaken any sales promotion activity at the behest of the supplier and the incentive has been passed on by the supplier in the form of post supply discount then there is an exposure on the dealer necessitating rectification for the past and calls for re-consideration going forward.
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Case 3: Post supply discount to offer a special reduced price by the dealer to the customer to augment sales volume
Clarified:
- Such discount would represent additional consideration flowing from the supplier of goods (manufacturer/ wholesaler) to the dealer for supplies effected by the dealer to customers.
- These discounts are to be added for the purposes of deriving consideration in the hands of the dealer.
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This highlights an exposure for various types of discounts extended to the dealer by the supplier. Such as on account of stock clearances, season end sales, stocks approaching expiry etc. All of them can be argued to be in the nature of special reduced value as well as for the purpose of augmenting sales volume.
Moreover, for such transactions it has also been clarified that no ITC for additional tax paid will be available to the customer (as amount is being effectively paid by the supplier to the dealer and not by the customer). This is further bound to complicate such transactions and hence calls for immediate re-structuring. As for the past necessary rectification procedures are required to be undertaken.
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Treatment of target-based discounts:
Three aspects which have been specifically clarified by the circular have been discussed above. However, one major aspect which has not been specifically clarified is Target based discount. For e.g. X Ltd is a wholesaler/ manufacturer of bottled beverages with Y Ltd being its dealer for Delhi Territory. X Ltd agrees to allow 10 percent additional discount to Y Ltd on achieving target of INR 1 crores in sales. To maximize its sales, Y Ltd uniformly starts undertaking sales at 10 percent standard discount. Whereby on achieving the said sales target Y Ltd claims the discount from X Ltd. X Ltd passes on this discount through issuance of credit note.
In such case, let us presume that all the conditions specified vide Section 15(3)(b) (discussed supra) are fulfilled. Hence, the post supply discount (sans the circular) should be allowable.
Let us now, compare the said example with the cases which have been clarified vide the circular. Para 3 discusses post supply discount without any further obligation or action at the dealer's end. In our above example, the post supply discount is conditioned with a rider of achieving a specified sales target. Hence, it fails the test set by para 3.
Moreover, the said example also does not get covered under the other two cases as they are specific to cases being - additional activity or discount at the behest of the supplier whereas in our example the discount has been extended voluntarily by the dealer. Therefore, the post supply discount should remain allowable for the given example. The answer should remain the same if in lieu of discount it is any additional activity undertaken by the dealer voluntarily to promote sales.
Majorly the implications arising out of the circular have been cast in the hands of the dealer. A segment which functions through download of approach formulated by the supplier. Inasmuch as the dealer is liable to be aware and cautious, it is equally an obligation on the supplier to ensure a trouble-free supply chain. Hence, it is important to collectively re-look into the present business positions and iterate accordingly. The circular subtly points at the vastness of territories un-defined within the domain of supply. It also causes to bring forth the haunts of past w.r.t valuation. The circular, in all probability, also gives teeth to the department which is already starving from lower than expected revenue collection under the GST regime.
(Anjali Aggarwal, Associate also shared her inputs for the article. The views expressed are strictly personal)
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