GST treatment of post-sale rebate/compensation not conforming to section 15(3)(b)(i) of the CGST Act

Sales promotion is intrinsic to the growth of any business. Promotional schemes such as buy one get one free, buy more save more, special price reduction etc. are offered by the businesses to increase sales volume and to attract new customers for their products. Normally such schemes are different forms of passing on the discounts to the customers. Some of the sales promotional schemes are launched by the manufacturers post the supply has been made and to service such promotional schemes discounts are passed on in the supply chain i.e. in the manufacturer-distributor-dealer-customer supply chain.

1.1 Where the discounts are known at the time of supply and are recorded in the sales invoices as such, the same are not includible in the value of the supply and such discounts do not pose any challenge regarding their taxability. However, where the discounts are given after the supply has been made and such discounts are not established in terms of section 15(3)(b)(i), tax treatment of such discount is an area where doubts and disputes abound.

2. To clarify certain aspects of post-sale discount or secondary discount, CBIC issued Circular No. 92/11/2019-GST dated 07.03.2019. However, the Circular clarified on a limited aspect concerning issuance of credit notes in cases where the discounts didn’t qualify as admissible discounts in terms of section 15(3)(b)(i). The Department clarified that financial/commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties. It was further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. It was also clarified that there is no impact on availability or otherwise of ITC in the hands of supplier in this case.

2.1 After the issue of Circular No. 92/11/2019-GST various representations were submitted by the trade and industry seeking clarifications in respect of tax treatment in cases of secondary discounts or post sales discount. With an aim to clear the confusion on the treatment of post-supply discounts under GST, the CBIC issued a Circular No. 105/24/2019-GST dated June 28, 2019 (“Circular 105”) captioned “Clarification on various doubts related to treatment of secondary or post-sales discounts under GST”, wherein the Department clarified that: -

(i) 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.

(ii) 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.

(iii) Discounts not falling under the above two categories would be discounts, but such discounts would not be deductible from the value of the supply and the recipient is not required to reverse the ITC in proportion to the discount.

2.2 So far as the clarification in point (i) above is concerned, this is completely in line with the global practice and there is no challenge in such post-sale discounts. Similarly, there is no challenge in the discount in point (iii) above. However, regarding the clarification in point (ii) above, numerous representations were received by the Department expressing apprehensions on the implications of the said Circular. The Circular created a situation where the additional discount given by the supplier with the obligation on the dealer to pass on the similar discount to his (dealer’s) customer constituted additional consideration in the hands of the dealer for a supply made by the dealer to its customers and accordingly liable to GST along with the GST on the consideration received from the customer.

2.3 Thus, instead of clearing the haze around the GST treatment of secondary discount, the Circular 105 went on to thicken that haze. It was represented by the industry that this circular violated the cardinal principle of GST that the tax is to be borne by the ultimate consumer. The industry represented that additional discounts are generally given to liquidate the old inventories or push products under weak market conditions. In view of the widespread criticism, the Department decided to withdraw the Circular No. 105/24/2019-GST dated 28.06.2019 ab initio vide Circular No. 112/31/2019-GST dated 03.10.2019.

2.4 However, after the withdrawal of the said Circular, the CBIC hasn’t come out with any clarification on this issue and the controversy over it hasn’t ended and the industry has been left to its wits to take a call on this vexed issue. On the other hand, in spite of the Circular being withdrawn, the tax authorities and Advance Ruling Authorities are still resorting to the said circular while answering this tricky question. (Refer AAAR decision in Santhosh Distributors in Appeal Order No. AAAR/10/2020 dated 01.03.2021).

3. In this paper, it is the endeavour of the author to set out the principles in line with the global practice on the taxability of the post-sale discount, in particular post-sale discount not conforming to the provisions of section 15(3)(b)(i) of the CGST Act, 2017. The paper attempts to define principles relating to the following situations: -

(i) When a post-sale discount constitutes an additional discount.

(ii) When a post-sale discount constitutes a consideration for a supply by the

recipient of the discount to the payee of the discount.

(iii) When a post-sale discount constitutes an additional consideration in the

hands of the recipient.

4. The term ‘discount’ is commercially understood as a diminution or reduction in the sale price. The term ‘discount’ has been defined in the Black’s Law Dictionary, (10th Edition) to mean:

“Discount: 1. A reduction from the value of something, esp. a price.”

The Merriam – Webster Dictionary (2018 edition) defines the term ‘discount’ as follows:

“discount: a reduction made from a regular or list price”

4.1 Therefore, any reduction in the sale price of goods is recognized as a ‘discount’ in commercial parlance. A discount given as per agreement between parties or a discount given by way of established trade practice between parties even sans a formal written agreement, has been recognized as a ‘trade discount’, which normally is deductible from the taxable value for the levy of indirect taxes in the nature of the erstwhile sales tax/VAT and/or excise duty.

4.2 It is viewed that in a seller-buyer relationship, reduction in sale price of the seller is corresponding reduction in the purchase price of the buyer and such reduction in price is discount. However, reduction in his sale price by a constituent in a supply chain, without corresponding reduction in purchase price from the immediate supplier, in lieu of reimbursement equivalent to reduction in selling price by the supplier other than the immediate supplier in the supply chain, cannot be termed as discount because the discount must have the effect of reduction in sale price and corresponding reduction in purchase price.

4.3 In view of the above, reduction in sale price of the seller with corresponding reduction in the purchase price of the immediate buyer would only constitute as a discount. Any incentive, which does not result in reduction in sale price of the seller i.e. transaction 1 but results in reduction in sale price of the buyer i.e. transaction 2 is reimbursement of the discount given by such buyer to his customers. Thus, a rebate will be termed as a discount only between the seller and his immediate buyer. Any incentive given by the seller to a person, other than his immediate buyer, in the supply chain is not a discount and depending on the situation would constitute reimbursement either for the discount given by such person in the supply chain or for supply of a service by such person.

5. It is viewed that in the manufacturer-distributor-dealer-customer supply chain promotional schemes are run by the distributors as per the contract with the manufacturer, wherein the contract stipulates that the distributor, from time to time shall run promotional schemes as designed/run by the manufacturer. The discounts offered by the distributors in terms of such contractual obligations, which are known at the time of supply, whether the discounts are quantifiable or not at the time of supply, but the mechanism to quantify the discount is identified in the contract, would qualify as discount.

5.1 Where the discount offered/negotiated after the supply and not relatable to any contractual obligation is given by the manufacturer to the distributor in lieu of the distributor doing certain things to get the discount i.e. any further obligation is cast by the manufacturer on the distributor in lieu of the discount, the discount would qualify as a consideration for the supply of a separate service by the distributor to the manufacturer.

5.2 Globally also, the principle of reduction in the sale price is adopted to identify the discounts and discount passed on in a supply chain is not considered additional consideration at any stage of the supply chain. Goods and Service Tax Ruling GSTR2014/1 passed by the Australian Taxation office, Australian Government, consequent to the decision of the Full Federal Court in AP Group Limited v. Federal Commissioner of Taxation (2013) 214 FCR 301; [2013] FCAFC 105; 2013 ATC 20-417 (AP Group), brings out in detail the circumstances where the incentives given to augment the sales would constitute as additional consideration in the hands of the seller. It is clarified in para 55 specifically that no adjustment is required where the payee (recipient of amount) purchases the goods directly from the manufacturer since it would be treated as discount and not an incentive flowing from a third party.

54. The incentive payment must be made to a dealer that acquires a thing that the manufacturer supplied to another entity. There may be multiple interposed entities between the manufacturer and dealer.

55. No decreasing or increasing adjustments under Division 134 arise if the dealer acquires the thing:

directly from the manufacturer, or from another entity, but the manufacturer never previously supplied that thing at any stage of the supply chain.

5.3 It is viewed that the post-supply discount passed-on through the supply chain would necessarily have the effect of reduction in sale/purchase price at every stage of the supply chain and cannot be considered as an additional consideration for a later transaction in the supply chain.

5.4 In the Indian context, the only difference between discount admissible under section 15(3)(b) and discount not admissible under the said provision is that in the former, reduction in the transaction value with corresponding reversal in ITC is permissible, whereas in the latter the reduction in transaction value is not permissible.

5.5 However, even if a discount is not an admissible discount in terms of section 15(3)(b), it still remains a discount if the net effect of the discount is to reduce the purchase price and it would not become an additional consideration in the hands of the recipient.

6. In the manufacturer-distributor-dealer-customer supply chain, if the manufacturer offers the discount(reimbursement) directly to the dealers (where no goods were supplied by the manufacturer directly to the dealers) to enable them to offer the goods at a reduced price to dealer’s Customers, it would be treated as additional consideration flowing from the manufacturer (a third party) to the dealer for supply made by dealer to its customers. If a discount(reimbursement) is given by jumping the constituents of the supply chain, it will qualify as additional consideration in the hands of the dealer.

6.1 It is viewed that the above proposition would also be in line with the international practice. HMRC VAT Notice 700(7) on Business Promotion, in para 6.3 clarifies as under: –

“Multisave promotions subsidised by a manufacturer”, clarifies that where the manufacturers make payments to retailers towards the costs of promotions such as buy 3 items for the price of 2, if you receive these payments as a retailer, they represent further consideration for the supply to the customer and so you must account for VAT.

6.2 Further, where the additional discount is passed on by the manufacturer out of a benevolent gesture/business requirement, anticipating that the distributor would be able to clear the existing stock at a reduced/discounted price and would place order for fresh supplies, without casting any obligation on the distributor in lieu of the discount, the same would qualify as additional discount.

6.3 Also, where the discount is offered by the distributor, on his own volition, not as an obligation to the discount given by the manufacturer, the discount by the manufacturer would be additional discount.

Conclusion

7. The guiding principles to determine whether a post-sale discount is an additional discount in the hands of the recipient or a consideration for a supply by the recipient of the discount to the supplier or an additional consideration for a subsequent supply made, can be summarized as under: -

· Where the intention of the parties, their actions and written documents clearly show that the amount paid by way of additional discount relates to a change in the selling price, it is an additional post-sale discount. The transaction should have the effect of reducing the sale value of the supplier and purchase value of the recipient.

· Post-sale discount passed on in the supply chain without casting any obligation except to pass on the similar discount in the supply chain would qualify as additional discount only.

· Post-sale discount passed on in the supply chain by casting an obligation other than selling the goods on a reduced price would qualify as a consideration for a separate supply of service by the recipient of the discount to the supplier.

· Post-sale discount(reimbursement) passed on in the supply chain bypassing the immediate constituent in the supply chain with obligation to sell the goods at reduced price would qualify as additional consideration.

********