Clarifications on GST treatment of sales promotion schemes

Nature of transaction

Clarification issued

Post-sale discounts given without mandating dealer to perform any activity

Such discount shall be treated in relation to original supply and will be deductible from the value of supply if the conditions specified under Section 15(3) of the Central Goods and Services Tax Act, 2017 (’CGST Act’) are satisfied.

If the conditions under Section 15(3) are not satisfied and the supplier issues a financial credit note, the dealer can claim ITC of full amount of tax as charged by the supplier. There will not be any requirement to reverse ITC in terms of second proviso to Section 16(2) of the CGST Act.

NITYA Comments:

This clarification nullifies the Advance Ruling issued in the case of MRF Limited, 2019-VIL-71-AAR. In this ruling, the AAR held that the recipient is required to reverse credit proportionate to the discount received since such amount is not paid by the recipient to the supplier.

Post-sale discounts given to dealer for undertaking additional activity / ‘sales promotion activities’

If the dealer undertakes specific activities as instructed by the manufacturer such as sales drive, exhibition, advertisement campaign etc., these will be considered as independent supply from dealer and GST will be applicable. The manufacturer will be eligible to take ITC on the same.

NITYA Comments:

This clarification is in line with the legal provisions. Basis this Circular, becomes abundantly clear that there is no supply of service from dealer to manufacturer in case of discounts (like cash discount, turnover discounts etc.). In the light of the same, the dispute being raised by DGGI that such discounts qualify as ‘agreeing to do an act’ and should attract service tax / GST, can be defended.

Post sales discounts given to offer ‘special reduced price’ to customers to augment sales volume

Such discount will be considered as an additional consideration flowing from supplier to dealer for the supply made to customer. Such amount will be added in the assessable value charged from customers under Section 15 of the CGST Act and chargeable to GST. The registered customer can claim ITC of GST charged by dealer on discount component if it pays full GST to the dealer.

NITYA Comments:

This part of the Circular is adverse for the taxpayers apart from being legally incorrect. The Circular misses an important point that an amount given to the dealer qualifies as purchase discount and only has nexus with the goods purchased by the dealer. Such an amount cannot be said to be additional consideration for goods sold by the dealer to the customer in the same breath.

If this clarification is implemented, this will directly increase the tax incidence on the goods sold by the dealers. Further, the end customers to whom the dealers sell goods are generally unregistered persons for whom GST is a cost.

It is important to note that since Circulars are clarificatory in nature, this is likely to result in tax demands on dealers for discounts received by them from July 1, 2017 onwards. The manufacturers and dealers should file representations before the Government to explain the nature of such discounts and withdrawal of this part of the Circular.