Background of the issue:
To settle the haze surrounding on 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”. This Circular was issued pursuant to various representations submitted by the trade and industry seeking clarifications in respect of tax treatment in cases of secondary discounts or post sales discount, after Circular No. 92/11/2019-GST was issued on March 7, 2019 (Clarification on various doubts related to treatment of sales promotion schemes under GST).
Amongst other clarification(s), Para 3 and 4 of Circular 105, inter alia, stated the following as regards secondary or post-sales discounts under GST:
- If the additional discount given by the supplier of the goods to the dealer is the post-sales 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 subject to GST.
- To augment the sales, the manufacturer gives a special discount in the form of reduced price by the dealer to customer. Such an additional discount represents the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to consumer and hence, is subject to GST.
Rigorous Representation before concerned Authorities by Mr. Bimal Jain:
In view of the above factual background, it was represented before the concerned authorities requesting their kind consideration on the below mentioned issues/concerns, leading to severity of post-sale discount conundrum:
- Passing additional discount by manufacturer/ supplier to the dealer is a pure financial transaction rather than being a ‘supply. By offering an additional discount to sell the product, the dealer or the manufacturer did not supply any goods or any extra services so as to make it chargeable to GST.
- The entire idea of Circular 105 may have found justification where two dealers are not in a relationship of ‘supplier’ and ‘receiver’ for those particular goods on which discount is being given. But where the supplier has sold certain goods to the dealer, at first place, and then, some additional discounts are given to the same dealer and on the same underlying goods, then, it appears cryptic to treat this discount as an addition to the sales price of the dealer on subsequent transaction of sale to customers, rather than treating the same as discount on base transaction.
- Equating ‘discounts’ with ‘consideration’ goes contrary to essentials of Indian Contract Act, 1872. The act of supplier 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.
- Even the ‘additional discount’ does not fit within the four corners of term ‘consideration’ as defined in GST law.
- Including the amount of additional discount in value of supply by dealer to customer will negate the benefit of reduced prices to customer. Ultimately, the value of supply will be higher and how would the customer get the benefit of the reduced price?
- No clear parameters to determine whether “action is required” at dealer’s end.
- If the tax burden is ultimately to be borne by the supplier himself, then how the transaction will be routed? Further, what would be the point of taxation in such cases? How to determine the correct point in time when the dealer is required to deposit GST on the amount of additional discount?
- Break in input tax credit (“ITC”) chain and double hit on manufacturers - reduced prices of commodities along with additional tax burden (non-creditable) on a value which is not even realized.
GST Council decides to rescind Circular 105, ab-initio:
In the light of matter being represented with the CBIC and GST Council, the GST Council in its 37th meeting held on September 20, 2019 has recommended to rescind Circular 105, ab-initio.
Thanking GST Council for hearing the concerns of affected industries:
PHD Chamber of Commerce, conscientiously represented the matter before concerned authorities, explaining the unintentional hardships on suppliers offering incentives to dealers as sales promotion activity to boost sales.
We are thankful to the GST Council for listening to the voice of trade and providing much-needed relief. This truly reflects the wise intentions of our Govt to be a partner in stimulating ease of doing business in India.
Withdrawing the above circular does not put end to ongoing post-sale discount conundrum. In the interest of ease of doing business and to ensure no litigation on this issue in future, concept of commercial/ financial credit note (without GST) must be applied uniformly to all such scenarios of post-sales discounts, falling short of the conditions as mentioned under Section 15(3)(b) of the CGST Act. It is needless to mention that the CBIC itself has accepted the concept of a commercial/ financial credit note (without GST) in its earlier circular dated March 7, 2019 and FAQs, which was reiterated in impugned Circular 105 as well.
Suitable clarification in line with intention of trade and industries is also required to be issued.