Post - Sale Discounts: Clarification or Confusion?
JULY 16, 2019
By Deepak Suneja, Associate Partner, NITYA Tax Associates
THE implementation of GST by the Finance Ministry can be a role model in Indian context for other Central Ministries as well as State Governments, on how such mammoth reforms can be successfully implemented by unfettered efforts. The Government has been largely successful in curbing red-tapism and adhering to common man's representations on day to day issues. However, with a single legislation for indirect taxes, it was always expected that several doors for legal interpretations will inadvertently remain open. In this article, we will discuss the topsy-turvy journey of post-sale discounts under GST regime, specifically in light of recent Circular issued on this topic.
Emergence of issues related to post sales discounts
Post-sale discounts, as the name suggests, refer to discounts which are provided/offered post the sale of goods has been occasioned. With the introduction of GST, the moot question hovering over taxpayers was whether they are allowed to reduce the tax element related to the same from the tax initially paid or not. With passage of time, the taxpayers realized that as long as the recipient is allowed full credit of the initial tax charged by them, reduction of tax liability and passing on the same to the customer did not offer any gain to them. Hence, they became more interested in issuing non-GST credit notes for post-sales discounts.
Circular No. 92/11/2019-GST dated March 7, 2019 issued by CBIC, amongst other things, clarified that if all the conditions for claiming deduction of post sales discount provided under Section 15 of the CGST Act are not fulfilled, accounting credit note can be issued for the discount portion of the value of supply. The industry perceived it as a green signal to issue non-GST credit note for post-sales discounts, since they could always contend that the condition of recipient reversing the credit was not satisfied.
The peace of mind was short-lived, with pronouncement of the ruling in case of MRF Limited 2019-TIOL-87-AAR-GST. The Advance Ruling Authority (AAR) observed that in case of cash discounts, the customer does not pay full amount to its vendors. Basis above, the AAR held that the same tantamount to non-payment of the short paid amount (equivalent to amount of post-sales discount), and the customer shall finally not be eligible to avail credit to the extent of discount.
While in their minds, the taxpayers knew that the Advance Ruling is incorrect as well as illogical, the risk of department denying credit on discount portion of their procurements loomed over their head. The huge quantum of post-sales discounts, possibility of department raising disputes and huge litigation costs associated thereto, instilled fear in their minds.
In this regard, the Government recently issued Circular No. 105/24/2019-GST dated June 28, 2019 ('Circular'). The clarification and confusion brought in through the Circular is discussed in the succeeding paragraphs:
Clarifications issued through the Circular
The CBIC has clarified the following points in the Circular:
1) Post-sale discounts given without mandating dealer to perform any activity will be treated in relation to original supply and will be deductible from the value of supply, if the conditions specified in GST Act is satisfied. If the conditions are not satisfied and the supplier issues financial credit note, the dealer can claim ITC of full amount of tax charged by supplier. This effectively overrules the MRF's advance ruling and brings back clarity in minds of the taxpayers.
2) Post-sale discounts given to dealer for undertaking sales promotion activities by dealers will be treated as independent supply from dealer and GST will be applicable on it. The manufacturer will be eligible to claim ITC on the same. This was implied and the dealers were already charging GST in such cases.
The clarification issued in the first two points also implies that the dealer is not liable to charge GST in case of post-sales discount where dealer does not undertake any activity. This confirmation of sorts is very important as DGGI is raising notices on dealers demanding service tax/GST on cash discount, turnover discount etc. provided to dealers. The DGGI claims that this is covered under 'agreeing to do an act'. The CBIC should have considered issuing a specific clarification on this matter to avoid further disputes by the department. Nonetheless, the taxpayer can still rely on this Circular.
Confusion created by the Circular
'It is the mark of an educated mind to be able to entertain a thought without accepting it….'
These are the words which come to our mind while reading Paragraph 4 of the Circular, which deals with 'post-sales discounts given to offer special reduced price to customers'. The Circular clarifies that this discount will be considered as an additional consideration flowing from supplier to dealer for the supply made to the customer. Accordingly, such amount will be added in the consideration payable by the customers and be chargeable to GST.
Why this Circular is incorrect?
While on the face of it, the Circular seems to make sense, on a deeper analysis, one may realize that it is grossly incorrect. To understand this, it is important to dwell upon the term consideration in any contract. As per Indian Contract Act, 1872, 'consideration' may move either from the promisee or from any other person. However, it should be agreed in the contract that the consideration will move from the third person. The act of manufacturer giving a discount to the dealer to pass on the same to the end customer will not qualify as 'consideration' from the customer, since the amount has not been specified in the contract entered between dealer and customer. In fact, customers are not even aware of any amount being supplied by the manufacturer to the dealer to boost sales volume. Hence, the amount can by no stretch of imagination qualify as additional consideration.
Having said that post sales discount given to augment sales volume should not form part of consideration, the Department may argue that post sales discount is in the nature of subsidy provided by supplier to dealer to boost sales volume. This is altogether a different topic to debate upon and we have not covered the same in this article.
The extent and implications of the Circular
The paragraph 4 of the Circular, if relied upon, has far reaching implications. It will pose a threat on other type of discounts provided by manufacturers to its dealers. For instance, it will challenge GST position taken on pre-sale discounts provided to dealers to offset special reduced price provided to customers to boost sales volume. This is popular in garment industry where the manufacturer provides special discounts upfront to dealers to further pass it on to consumers to boost sales volume. If the Circular is read in its strictest sense, such discounts, since passed to the customers, must also be added to the consideration charged from customers. Hence, the concept of discount under GST law will get diluted.
Also, the manufacturers need to acknowledge that such differential GST will be non-creditable. This is because this additional consideration is proposed to be included in the value of supply charged from customer and will not be a supply to the manufacturers. Hence, manufacturers cannot get the credit in such cases. Further, end customers of impacted industries like auto, FMCG, garments, consumer durables etc. are often individuals who are not registered in GST and not eligible for credit.
Moreover, if the proposition of the Circular is accepted, it will have retrospective implications since Circulars are always clarificatory in nature. This will unfold multiple litigations of VAT regime as well, with VAT department arguing that sales price should be enhanced with additional consideration received by the dealer.
Conclusion:
Though two steps have been taken forward to clarify the ambiguities existing at dealer's end, one step backward has been taken by Paragraph 4 of the Circular. The industry and dealers will probably take some time to understand and react to this Circular, and once they do, they will understand why the Circular is quite damaging.
That said, the manufacturers and dealers should file representations before the Government to explain the nature of discounts in hand, explaining that they should not be considered as additional consideration. They should demand withdrawal of this part of the Circular. If not done, this will be starting of manifold litigations under GST regime.
(Co-author - Kritika Poddar (Senior Associate). The views expressed are strictly personal.)
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