SEPTEMBER 19, 2019

By Smita Roy, Partner - Indirect Tax, BDO India LLP

IN the wake of post sale discount circular (Circular No. 105/24/2019-GST, dated June 28, 2019) and low GDP worries plaguing the Indian economy, consumer facing sectors are grappling with dual pressure of demand revival and handling the impact of aforesaid circular on business. Effects of the anomalies in this circular are especially worrying amidst the efforts made by businesses in augmenting demand through festival linked promotional schemes. The conundrum created by this circular is better understood if one pays attention to GST treatment accorded to the following categories of post sale incentives or discounts:

- Paragraph 3 - Any post sale incentive by a manufacturer or a wholesale seller (supplier) to its distributor or dealer (dealer) for undertaking advertisement campaign, exhibition etc. is not to be considered as a discount against the original supply of goods. It is clarified that the incentive will be regarded as a 'consideration' towards a 'separate supply of service' by the latter to the former, and, consequently, trigger GST liability for the dealer. 

- Paragraph 4 - Any post sale incentive by the supplier to dealer for augmenting sales to consumer would be regarded as flow of additional consideration from the supplier to the dealer. Further, on sales to consumer, the dealer will have to pay GST on a taxable base which includes such additional consideration.

Therefore, as per the Circular, post sale incentive or discounts linked to supply of goods are either to be taxed as consideration towards supply of service by the dealer (refer Paragraph 3) or as additional consideration by the supplier to the dealer (refer Paragraph 4). This treatment is at variance with the GST laws, which prescribes adjustment of discounts from the taxable turnover of supplier (as against the dealer's turnover) subject to specified conditions being met. Deviation from the prescribed treatment is further worrying as the cost of promotional incentives/post sale incentives is factored in taxable base on which GST is paid by the supplier. Also, if the specified GST treatment is applied, dealers will be vulnerable to GST exposure for the past period and face scrutiny from GST authorities. 

Moreover, as the Circular traverses beyond the tenets of GST laws, it is likely to be challenged before appropriate courts and may not survive in its present form. Given this chaos, trade associations of dealers across segments such as FMCG, consumer durables, automotive etc. are resisting implementation of any post sale incentive scheme till further clarity emerges. Also, trade bodies representing manufacturers have represented for issuing a clarificatory circular.

As the festive season approaches, it is expected that the powers that be will address this issue with utmost haste to revive the flagging consumer driven sectors.

(Prabhsaran Singh Chadha (Senior Manager - Indirect Tax) contributed inputs to the article. The views expressed are strictly personal.)