Post sale discount under GST: Facile View

Introduction:

CBIC has issued Circular 105/24/2019-GST on treatment of Post Sale Discount also known as Secondary discount under GST Regime. The matter has been under litigation, in view of which CBIC has vide Circular No. 105/24/2019-GST (hereinafter refereed to as ‘the Circular’) clarified the certain vital issues concerning Post-Sales Discount.

2. This Article is an attempt by the author to decode and simplify the issues clarified under the Circular.

3. Post-Sales Discount :

Governing Provisions Post-sales discounts are governed by the provision of clause (b) of sub-section (3) of section 15 of the CGST Act, which is reproduced hereunder: “

                (3) The value of the supply shall not include any discount which is given–

                (a) ……………………….

                (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 (ITC) as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.”

4. From the perusal of the above it is clear that discount given after supply, shall not form part of value of supply only if it satisfies the following conditions:

 it was in accordance with agreement entered into before or at the time of supply. Further, such discount must be specifically linked to relevant invoices i.e. the discount must not be in relation to any other supply, and

 ITC attributable to such discount has been reversed by the recipient.

5. However, the Act was silent on some issues concerning post-sales discount example: discount is given by supplier to dealer in lieu of some additional activity.

6. To untangle such questions CBIC issued Circular no. 105/24/2019- GST dated 28.06.2019 clarifying the treatment of post-sales discount in different circumstances.

7. The Circular clarifies the treatment of post-sales discount in following situations:

a) Where further obligation or action is required at dealer’s end.

b) Where additional discount given is post-sale incentive requiring the dealer to do some act like special sales drive, exhibition etc.

c) Where additional discount is given by supplier to dealer to offer special reduced price by dealer to the customer to augment sales volume.

8. Case 1: Where further obligation or action is required at dealer’s end

Para 3 of the Circular 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 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 fulfillment of provisions of sub-section (3) of section 15 of the CGST Act. 

Example: A has entered into an agreement with B for supply of toys. The agreement provides that if B sells more than 200 toys then A will give B additional discount of 2% on the total sales made by B. B sold 250 toys during the month. Discount passed by Supplier would be eligible to be excluded from the value of Supply in the hands of dealer (B) subject to compliance of conditions stipulated under Section 15(3).

9. Case 2: Where additional discount given is post-sale incentive requiring the dealer to do some act like special sales drive, exhibition etc.

Para 3 of the Circular 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.

This is one of the most critical part of the Circular. It provides that if additional discount requires the recipient of the discount to do any additional activity for the supplier, then, it would be treated as consideration for carrying out such activity and therefore would be in relation to supply of service by the dealer to the Supplier. Some of the examples are special sales drive, advertisement campaign, exhibition etc.

The treatment of post sales retail target incentive received by the dealer would also be in question and would also fall under the purview of this clause. Example: ‘A’ (Supplier) supplies goods to ‘B’ (Dealer) and thereafter (after time of supply) agreed with ‘B’ to offer him discount of 2% on supply of goods provided that ‘B’ conducts advertisement campaign.

Under the above case the discount of 2% shall be considered as consideration for supply of campaign service provided by ‘B’ to ‘A’ and ‘A’ will be eligible to claim ITC of the GST so charged.

However, under the pre-GST regime, if such activities were carried out by Dealer under a contractual obligation, then the value of such activities were required to be included in the transaction value but, in the event, such activities were voluntary (without any contractual obligation), then value of such activities were not required to be included in the “Transaction Value” Alembic Glass Industries Limited Vs. UOI MANU/SC/3797/2006.

10. Case 3: Where additional discount is given by supplier to dealer to offer special reduced price by dealer to the customer to augment sales volume

Post sale discount under GST: Para 4 of the Circular

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.

Example: Distributor “A Ltd.” has announced a scheme wherein “B Ltd.” sold goods worth Rs 5500/- at a discount of Rs 500/- to C and discount of Rs 500/- given to “C” would be reimbursed to “B Ltd.” by “A Ltd.”. “B Ltd” in the above scenario would be receiving Rs 5500 i.e. Rs 5000/- from “C” and Rs 500 from “A Ltd”.

In the above Example, “C” would only be eligible to claim ITC in respect of Rs 5000 and he would not be eligible to claim ITC on Rs 500/- which have been paid to “B Ltd” by “A Ltd”. This treatment needs reconsideration as nobody would be able to take credit on tax paid on Rs 500/-. “C” would not be able to take credit since circular restricts him from doing so. “A Ltd” cannot take credit since Invoice would be in the name of “C”.

In my humble opinion, this is extremely unjust enrichment on part of the government. Since this violates the basic structure of indirect tax regime it needs to be reviewed by the government. The Hon’ble Supreme Court in the case of Government of India v. Madras Rubber Factory Ltd. MANU/SC/0725/1995 : 1995 (77) ELT 433 (SC) has, inter-alia, allowed “Year Ending Discount” and “Other Documents”. The judgment in the case of Government of India v. Madras Rubber Factory Ltd. MANU/SC/0725/1995:1995 (77) ELT 433 (SC) and later on in the case of Purolator India Limited Vs. CCE MANU/SC/0908/2015 has been consistently followed by the Hon’ble High Courts and various Benches of CESTAT.

11. Para 5 of the Circular for Post sale discount under GST

It is clarified that dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

Circular clarifies that no ITC would have to be reversed on post sales discounts excluded from the value of supply in the hands of the said supplier on account of such discount not being in accordance with the provisions contained in sub-section (3) of Section 15 of CGST Act.

12. The key distinction between Para 4 and Para 5 of the Circular

is whether 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. If yes then Para 4 and if no. the Para 5.

The situation would be complicated one and could entail litigation wherein discounts and incentives are given as lumpsum amount and without link to an invoice say in the name of Special Incentive etc.The circular is not clear about that situation and it would be a litigation between the department and the taxpayer wherein every such lumpsum discount would be seen by the revenue as a tool having an impact on reduction of selling price and by the taxpayer as a post-sale discount not linked to reduction of selling price. Therefore, every credit entry in the Profit and Loss account for a lump such discount of such nature would be a trigger for litigation.

The liberal and pragmatic approach is required to be followed while granting various types of Discounts