CBIC clarifies GST levy on post-sale discounts, to help reduce disputes

“Section 16 (1) of the CGST Act, 2017 provides that every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of his business… it is clarified that the recipient will not be required to reverse the input tax credit attributed to the discount provided on the basis of financial/commercial credit notes issued by the supplier, as there is no reduction in the original transaction value of the supply and accordingly the corresponding tax liability would also not get reduced,” the CBIC stated in the circular dated September 12 that has been issued to all central tax principal chief commissioners and chief commissioners across the country.

The Board also said that when a dealer engages in promotional activities to boost sales after receiving post-sale discount from a manufacturer, such activities should not be included in the consideration for a separate transaction of supply of services. These activities ultimately enhance the sale of goods that the dealers own and the discount reduces the sale price of the goods without being linked to any independent service rendered to the manufacturer, it said.

Similarly, in cases where there is no agreement between the manufacturer and the end customer, there are two independent sale transactions, one from the manufacturer to the dealer and the other from the dealer to the end customer. The dealer takes ownership of the goods purchased from the manufacturer and subsequently sells them to the end customer and the transaction between the manufacturers to dealer operates on a principal-to-principal basis. “These discounts are simply given for competitive pricing to push sales and merely reduce the sale price of the goods and are not linked to any independent activity rendered to the manufacturer. Therefore, it is clarified that such a discount cannot be included in consideration as the monetary value of the inducement of further supply of these goods,” the CBIC said.

Tax experts said the CBIC’s clarification provides certainty and will help in reducing legal disputes. Abhishek Jain, partner & national head, Indirect Tax at KPMG in India, said, “The clarification will help industry and trade execute such transactions with greater certainty and reduce disputes around what has long been a contentious issue. At the same time, for scenarios involving agreements with end customers for passing on specific benefits to end-consumers through dealers in the supply chain, businesses may need to carefully revisit and evaluate their positions.”

More importantly, it draws a clear distinction between routine trade discounts in principal-to-principal transactions, which merely reduce the price of goods, and situations where a manufacturer has an arrangement with the end-customer in which case the rebate becomes an inducement and forms part of the dealer’s consideration, Manoj Mishra, partner and tax controversy management leader, Grant Thornton Bharat. “The guidance also settles the debate around marketing support, clarifying that post-sale discounts are not taxable as services unless the dealer is contractually bound to perform defined promotional activities. From a practical standpoint, this puts the onus on businesses to carefully document agreements, credit notes, and customer-level pricing arrangements,” he said.