A recent circular issued by the government has clarified the treatment of trade discounts and credit notes under the Goods and Services Tax (GST) regime, but experts warn it may shift compliance and cash-flow burdens onto FMCG distributors.
Key clarification: Credit notes and ITC
GST Circular 251 confirms that financial or commercial credit notes issued without GST do not require distributors to reverse their input tax credit (ITC). ITC allows businesses to offset tax paid on purchases against the GST they owe on sales.
While this provides certainty for manufacturers, distributors face challenges. Many continue to hold excess ITC balances that cannot be fully utilised, effectively locking up working capital. Currently, there is no refund mechanism for such accumulated ITC, leaving distributors exposed to liquidity issues until the proposed amendment to Section 15 of the CGST Act is notified. This amendment, discussed in the 56th GST Council meeting, is expected to allow GST credit notes even without a pre-sale invoice linkage, which will eventually ease ITC accumulation at the recipient's end.
Impact on trade discounts
The circular also clarified trade discount rules. When manufacturers support dealer pricing, no additional GST arises. However, if discounts are promised directly to consumers, dealers must include the support in taxable value and pay GST. Routine dealer promotions remain exempt unless supported by a separate agreement and fee.
Industry response
The All India Consumer Products Distributors Federation (AICPDF), representing 4.5 lakh distributors and serving over 1.3 crore kirana stores, has sought urgent clarifications from the Central Board of Indirect Taxes and Customs (CBIC) on GST rate cuts and ITC treatment.
The federation highlighted potential issues following the GST rationalisation implemented from September 22, which introduced a dual-rate structure of 5% and 18%. Specifically, it pointed out an anomaly in the detergent segment: GST on detergent cakes has been cut to 5%, while washing powders remain at 18%, potentially affecting consumers.
AICPDF National President Dhairyashil H Patil stated, "While we welcome these reforms, urgent clarifications on input tax credit and anomalies like detergents are essential to ensure benefits reach consumers and avoid disruptions in retail trade."
Outlook
Experts note that while manufacturers gain regulatory certainty, distributors continue to face cash-flow pressures until legislative changes and further clarifications take effect. The government’s response will be closely watched by FMCG stakeholders as the dual GST-rate regime is fully implemented.
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