GST on Buy One Get One Free Scheme, Secondary Discounts & issuance of Credit Notes

Summary: The Central Board of Indirect Taxes and Customs (CBIC) clarified the GST compliance for schemes like “Buy One Get One Free” (BOGO) and secondary discounts through a circular issued on March 7, 2019. For BOGO offers, where a product is sold at the price of one but involves two products, the GST on both items is applicable. The supplier and receiver can both claim Input Tax Credit (ITC) on the entire supply. In the case of secondary discounts, which are provided after the sale, GST credit notes are typically not issued under Section 34(1) of the CGST Act. However, the circular clarified that such post-sale discounts could be settled using commercial or financial credit notes without affecting ITC for the supplier. Secondary discounts will not impact the value of the original supply, as they were not known at the time of the initial sale. An example illustrates this with a distribution chain, where a commercial credit note is issued from one channel partner to another, adjusting the sales price based on the discount provided. The circular helps clarify the treatment of these discounts and schemes under GST, minimizing confusion and potential litigation.

Generally, it is common trade practice of FMCG companies that they offer various schemes, discounts and benefits for sales promotion and new product introduction in the market.

For this company generally issue Credit Note. Now question arises about GST compliance of such credit note issued which is post sale discount or scheme.

In order to minimize confusion and future litigations, CBIC (Central Board of Indirect Taxes and Custom) issued a circular on 7^th March 2019 which clarify Secondary Discounts and Buy One Get One Free Type Offer.

Sometime companies announce offers like “Buy One Get One Free” type offers, for example a company offer purchase one product and get another one free. As first glance it appears that one product is supplied free without any consideration but it is not an individual supply of free goods but it is supply of two or more products at the price of one. It means single price is charged for the entire supply.

In this case as per above mentioned circular there should not be any confusion regarding Input Tax Credit or Output Tax Credit. Supplier will be allowed to take ITC of both the products and Receiver will be allowed to take ITC as per Outward Supply Invoice.

Sometime companies provide secondary discounts; secondary discounts are those discounts which were not known at the time of supply.

For example, Price of a commodity is Rs. 50 Per Unit, A Supply 1000 Units of such commodity to B. Total value of sale Invoice was Rs. 50,000. Afterwards A decided to give discount @ Rs. 1 per unit on such commodity on sale target basis. After further sale B become eligible for discount of Rs. 1000 (1000 units @ Rs. 1 Per Unit).

Now how A will settle the claim of B for Rs. 1000 against post sale discount or secondary discount ??

Because as per section 34(1) of CGST Act, 2017, GST Credit Notes can be issued only in the following cases:

• In case of excessive price
• In case of Sale Return
• In case of Shortage

Bare provision of section 34(1) is as follows: –

“Where one or more tax invoices have] been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient ²[one or more credit notes for supplies made in a financial year] containing such particulars as may be prescribed”.

Now it is clarified that conditions laid down in Section 34(1) are not satisfied thus Credit Note in that section cannot be issued but now as per the above mentioned circular A will issue Commercial or Financial Credit Note for settlement of post-sale discount of Rs. 1000.

It was also clarified in such circular that secondary discounts will not be excluded while determining value of supply as that discount was not known at the time of supply and there will be no Impact on ITC (Input Tax Credit) in the hands of supplier in this case.

Detail Example of both the above cases

In the above example Company is having distribution channel network of 3 Level i.e. Company, Level 1 Channel Partner and Level 2 Channel Partner.

Step 1 Company Sold Goods to Level 1 Channel Partner

Step 2 Level 1 Channel Partner sold goods to Level 2 Channel Partner

Step 3 Level 2 Channel Partner sold goods to Level 3 or Wholesaler or Retailer

Company Sold 2 Products to Level 1 Channel Partner for Rs. 118 and 70.80 respectively. Level 1 Channel Partner sold the same to Level 2 Channel Partner at Rs. 123.90 and 74.34.

After that Company instruct level 2 channel partner to give free product B if anyone purchase Product A. (Buy One Get One Free)

Now what should be the compliance series as per above mentioned circular????

• ITC of Channel Level 2 will not affect even he sold 2 goods at the price of 1.
• As Channel 2 Level Partner sold product as “Buy One Get One Free” scheme thus company will issue Commercial or Financial Credit Note to the Channel level 2 calculated as follows:-

Purchase Price (Before GST) = Rs. 105 (Product A) + Rs. 63 (Product B) = Rs. 168

Sale Price (Both Products Before GST) = Rs. 110.25

Net Loss to Channel Level 2 = 168-110.25 = Rs. 57.75

• Company will issue Commercial Credit Note to Channel Level 1 and further Channel Level 1 will issue Commercial Credit to Channel Level 2.