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There are some recent media reports which brings out that the GST department is monitoring and watching over the discounts and offers given by car and other dealers to its customers to know whether any kind of revenue leakage occur to the exchequer from these transactions. As the discounts are passing in difference ways and also, the complexity in discount accounting, its taxation also become a headache for most of the businesses. The department vides its circular No. 92/11/2019-GST dt. 7th March 2019, tried to clarify most of the issues related with discounts. Here we are trying to analyze the practical aspects of discounts and freebies and their provisions under GST laws.


There are three broad categories of discounts and offers

i. Discounts and offers of dealers from their own pocket – here, for improving sales or to overcome competition or to liquidate aged stock, dealers offer some discounts on goods they supply. This will normally offer before or at the time of supply.

ii. Discounts and offers of manufacturer passing by dealers to customers – there will be some discount schemes of manufacturer which is passing to customers by dealers. This will be given to dealers normally after the supply ie; post sales discounts.

iii. Discounts from manufacturer on certain volume of purchases or retails, it may or may not be passed over to customers – Normally, manufacturers will fix some retail or wholesale target to dealers and incentivize dealers for achievement of targets.


“Sec 15 (3) – The value of supply shall not include any discounts which is given –

(a) Before or at the time of the supply if such discounts have been duly recorded in the invoice issued in respect of such supply; and

(b) If the supply has been effected, if –

(i) Such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) Input tax credit as is attributable to the discount on the basis of documents issued by the supplier has been reversed by the recipient of the supply.”

So it is clear that discounts given to customers are excluded from value for GST liability provided the discount should be recorded in the respective invoice issued. Dealers are free to offer discounts to its customers.

Now the question is whether any amount received later from manufacturer to dealers for the discounts offered to customer is taxable? This is discount offered by manufacturer to dealers after supply. Here manufacturer already paid GST for full invoice price. As per sec 15 (3) (b), after the supply, if manufacturer can establish that discount is as per the terms of an agreement entered into at or before the time of supply, specifically linked to any particular invoice and a credit note in this effect is issued to the dealer and the dealer reverses the input tax credit already availed, then manufacturer can take input tax credit. If the dealer has not reversed the input tax for the discounts received from manufacturer, manufacturer cannot exclude discounts from value of supply for GST liability and take input tax credit. So, what if the conditions laid down u/s 15 (3) (b) is not satisfied? The manufacturer will not get GST benefit on discount. Then, what will be the dealers’ liability for the discount amount received without GST credit note. Still dealer wants to reverse the input tax on discount received or pay GST on discount received?? This will be discussed later.


Let us now look at what GST laws say about freebies and gifts offered to customers. Under section 7 of the CGST act, to constitute a “supply” following elements required to be satisfied.

i. It should be made in the course or furtherance of business

ii. There should be some consideration involved.

Apparently, it seems that gifts, where no consideration involved do not fall under supply but before reaching to a final conclusion we need to analyze some other provisions of CGST act which says about supply without consideration.

A. Under section 17 (5) (h) of the CGST act, the relevant provision of the section specifies that:

Notwithstanding anything contained in sub section (1) of section 16 and sub section (1) of section 18, input tax credit shall not be available in respect of following namely:-

“Goods lost, stolen, destroyed, written off or dispose of by way of gift or free samples”

B. Entry Number 2 of schedule I:

Activities to be treated as supply even if made without consideration – supply of goods or services or both between related persons or distinct persons as specified in section 25, when made in the course or furtherance of business provided the gifts not exceeding Rs.50000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

Thus, input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.  However, supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business, even if made without consideration, will fall within the scope of “supply”, liable for GST and the supplier would be eligible to avail input tax credit.

Sometimes dealers announces offers like “buy one get one for free”. In this case, it is not an individual supply of goods free of cost. Instead a single price is charged for the entire supply where two or more supplies included. Taxability of such supplies will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined accordingly as per the provisions the Act.


Now the question is whether deduction is available on volume based discounts post supply.

These discounts are not generally related with any particular invoice instead for a volume based. If such discounts are established in terms of an agreement entered into at or before the time of supply though not shown in the invoice as the quantum of such discounts gets determined after the supply has been effected and generally at the yearend or at certain period, such discounts can be availed as a deduction from value for GST liability.

The Authority for Advance Rulings (AAR) of Maharashtra has ruled that the post- sale discounts offered by manufacturers to dealers cannot be deducted from the transaction value under the Goods and Services Tax (GST) regime. The AAR ruled that according to GST law, the discount given after the goods have been sold has to be established in terms of agreement signed before or at the time of sale of goods.

This means that the discount to be given has to be mentioned in the terms of the agreement entered into at the time of sale. “The wordings of section 15 (3) (b) (i) of the CGST Act clearly states that the quantum of discount given after the supply of goods has taken place has to be there in the agreement. It cannot be open ended,” said AAR.

So, one thing is clear that post sales discounts, if it is not established in terms of an agreement, cannot be deducted from transaction value for GST. Here the question is, if it not allowed as deduction from transaction value for manufacturer, will it become a value of supply for the dealer and liable for GST in the hands of dealer? by treating it as a consideration for supply of goods or services.

For charging GST there required a “supply” of goods or services and the value of such supply shall be the transaction value, which is the price actually paid or payable for the supply. 

In the above case.

1. There is no supply from dealer to manufacturer. So the discount or incentive from manufacturer to dealer is not a consideration for any supply of goods.

2. It cannot be considered as a subsidy in support of customer as its came from same person who supplied the goods initially and not from any other person.

3. GST liability ultimately is on the price actually paid or payable for the supply of goods or services by the end customer himself or somebody else on his behalf.

4. These amounts take the form of additional margins, allowances and redistribution margins related to volumes and not price paid in behalf of customer by manufacturer

5. The discounts or incentives paid from the margins which was collected earlier from dealers and GST has already been paid.

6. In any case, Even if GST is levied, it would largely be revenue neutral as the manufacturer is entitled for GST input credit.

7. There is also no service provided by the dealer to manufacturer other than purchase from manufacturer on principal to principal basis and reselling the same.

Sai Service Station Limited vs. Commissioner of Service Tax, Mumbai, the Tribunal held that;

“In respect of the incentive on account of sales/target incentive, incentive on sale of vehicles and incentive on sale of spare parts for promoting and marketing the products of MUL, the contention is that these incentives are in the form of trade discount. The assesse respondent is the authorized dealer of a car manufactured by MUL and is getting certain incentives in respect of sale target set out by the manufacturer. These targets are as per the circular issued by MUL. Hence these cannot be treated as business auxiliary service and not liable to tax.”

Even though, these are the arguments in support of not making the discounts liable for GST in the hands of dealers, some of the manufacturers still providing these discounts through GST credit notes or against GST invoices.  It is the easiest and safe way to do as they can get GST invoice and take GST input credit. Otherwise, they will have to convince and prove to the department if any notice come later and its really time consuming and expensive as they have to approach higher authorities with pre deposit of GST future.

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  1. Raman Kumar Khullar says:

    Very useful and informative article. Tamil Naidu AAR decision in the case of MRF should also be discussed and elaborated here. This judgment is having wide repercussions in this matter.

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May 2024