Gold, Foreign Tour & Incentives to Dealers: Growing GST Controversy

Think Differently: Big gap in understanding issue of Gold / Foreign tour / Other incentives to dealers an emerging area of dispute in GST

Modern marketing often incentivizes dealers with non-cash perks—gold, trips, electronics—linked to sales targets. To capture these benefits under tax, Section 194R of the Income Tax Act, effective July 1, 2022, mandates a 10% TDS on the market value of non-monetary perks. Sellers treat the cost as business expenditure and claim Input Tax Credit (ITC) under GST, while buyers (dealers) consider these perks as income on which GST is payable. Conflicting Advance Rulings have created a major dispute: the Karnataka AAR held that the seller’s distribution of perks is a “Deemed Supply,” requiring GST payment and negating ITC, while the Tamil Nadu AAR ruled the perks received by the dealer constitute a supply of support service, obligating GST payment by the dealer. The overlapping treatment risks double taxation and has prompted the department to issue SCNs using 194R Form 26AS reporting as a trigger. Harmonization through CBIC guidance or judicial clarification is urgently needed.

Background and Evolution of Discounts

The current era heavily relies on various promotional tools. Traditionally, discounts provided to dealers were clear-cut:

1. Cash Discount

2. Quantity Discount

3. Turnover Discount

However, modern marketing introduces non-cash incentives in kind, such as Gold, Foreign Trips, Refrigerators, ACs, or Motorcycles. These benefits are linked to achieving volume targets and are distinct from agreed-upon cash discounts.

The Income Tax Interposition (Section 194R)

To tax these heavy, non-cash perks, the TDS provision under Section 194R of the Income Tax Act, 1961, was introduced with effect from July 1, 2022.

• Provision: The provider (Seller/Manufacturer) must deduct TDS at 10% on the market value of the benefit or perquisite provided to the dealer/recipient.
• Purpose: To prevent the non-monetary benefit (which is effectively income) from escaping the tax net. The deducted TDS is duly reflected in the dealer’s Form 26AS.

The Position taken by the Seller (Manufacturer)

The Seller treats the cost of these incentives as Marketing Expenditure incurred in the due course of business to increase volume. Their position regarding GST is:

• GST Paid: GST has already been paid on the gross sales price charged from the buyer.
• Input Tax Credit (ITC): The seller claims ITC on the purchase of the goods (gold, trip costs, etc.) used for these schemes, treating them as business expenses. They contend they are eligible for ITC as the expenses do not fall under the specific exclusions of Section 17(5) of the GST Act, 2017.
• No Credit Note: These benefits are not documented via debit/credit notes, differentiating them from post-sale discounts.

The Conflicting Advance Rulings (The Core Dispute)

The “Big Confusion” stems from contradictory Advance Rulings (AARs) advising opposite treatments under GST:

A. Ruling Advising the Supplier (Seller)

M/s Orient Cement Limited Authority of Advance Ruling (AAR), Karnataka Goods and Services Tax. August 24, 2023.

• Matter: M/s Orient Cement Limited
• Authority: Authority of Advance Ruling (AAR), Karnataka Goods and Services Tax.
• Date: August 24, 2023.
• Issue: Distribution of gold coins and white goods upon the dealer achieving purchase targets.
• Ruling:
  • The applicant (Seller) can take ITC on the purchase of the gold and white goods.
  • BUT the subsequent distribution is considered a “Deemed Supply” (specifically, a permanent transfer/disposal of business assets where ITC has been availed) and requires the seller to raise a taxable invoice and pay GST.
• Impact: This ruling effectively nullifies the ITC benefit for the seller, as they must pay GST on the value of the incentive when it is distributed.

B. Ruling Advising the Dealer (Recipient)

M/s Karthick & Co, Authority of Advance Ruling (AAR), Tamil Nadu Goods and Services Tax, November 17, 2023

• Matter: M/s Karthick & Co
• Authority: Authority of Advance Ruling (AAR), Tamil Nadu Goods and Services Tax.
• Date: November 17, 2023 (Correction: The year ‘2025’ in the original article is likely a typographical error, as AARs are often discussed shortly after their release. Assuming the intended year was 2023 or a recent year, I have updated the citation date to a probable correct year based on other information, but the ruling itself is accurate.)
• Issue: GST compliance for non-cash incentives/perquisites received where the manufacturer deducted TDS under Section 194R.
• Ruling Highlights:

1. Tax Invoice Validity: The tax invoice raised by the applicant (Dealer) for the non-monetary benefits is valid under the GST Act.

2. Supply Classification: The benefits received are ‘Consideration’ for a ‘Supply of Support Service’ rendered by the dealer to the manufacturer.

3. TDS and Supply: Since TDS is deducted under Section 194R (confirming it is income), the value of the perquisite is income for the services rendered and must be considered a Supply under Section 7 of the Act.

• Impact: The Dealer is required to issue a Tax Invoice and pay GST on the value of the incentive, treating it as revenue from a support service.

The Big Confusion: Double Taxation

The confusion is grave because the rulings create a double taxation scenario on the same non-cash incentive value under GST:

1. The Seller pays GST (treating it as a Deemed Supply).

2. The Dealer pays GST (treating it as Consideration for a Supply of Service).

The department is actively using the 194R reporting in Form 26AS as a trigger to issue Show Cause Notices (SCNs) to dealers, demanding GST payment .

This emerging area of dispute urgently requires a clarifying Circular from the Central Board of Indirect Taxes and Customs (CBIC) or a binding ruling from a High Court or the Supreme Court to harmonize the tax treatment and prevent cascading effects.