Introduction
The retail sale of various motor vehicles, which include two wheelers, three wheelers, four wheelers, various types of passenger cars, commercial vehicles and tractors etc. is done in India through a large network of automobile dealers. The retail sale of vehicles is done by dealers on a principal to principal basis by engaging in retail trade (buying from O&M suppliers and willing to ultimate customers, such activities are trading activities for the dealers.
As a normal trade practice, in order to promote business, various sales promotion schemes are adopted and followed by the companies under which discounts and/or incentives called by different names are offered to the dealers who may or may not inturn pass it on to the customers based on their sole discretion / market competition.
Types of discount prevalent
Trade / commercial discounts are a part of normal business activity in auto industry.
These discounts are called by different names such as :
- Trade Discount
- Quantity Discount
- Target Discount
- Target Incentive
- Royalty bonus and so on
The automobile have dealers a practice of giving the following schemes:
- Dealer Trade Discount Scheme.
- Quarterly Bonus/Incentive Scheme.
- Annual Consistency Bonus.
- Star Bonus
The manufacturers of motor vehicles may offer Target and Non-Target based discounts to its dealers as agreed upon. The dealer who achieves the target of purchase/sale in case of Target based discount and who passes on the discount as per circulars issued to end customer in case of Non-target based discounts, gets quantity discount/ trade discount/ reimbursement and accounts for in its books of accounts under the income as ‘other operating income’. This does not relate to any taxable service, whatsoever, rendered by the dealers to its customers or to the manufacturers.
The manufacturers provide such discounts by way of credit notes wherein amounts are credited to dealer’s account after verification of documents and details of each dealer.
In the credit notes issued to eligible dealers, manufacturer specifies certain amount of bonus/discount for specific vehicle which has accrued to dealer models. Observing and implementing such scheme by dealer is as per the obligation stipulated in dealership agreement, and the dealer was required to implement these schemes while selling the vehicles, and in return the dealer received certain pre-fixed discounts / incentives from manufacturer subject to the verification of claim made by dealer. Discount provided by the manufacturer is related to sales only and has nothing to do with services.
It is a fact that the activities between manufacturer and dealer are pure trading services of sale and purchase of vehicles and there is no service element involved therein.
Taxability under GST Regime
Treatment of discounts under GST laws (section 15 of CGST Act, 2017 read with rules 28 to 35 of CGST Rules, 2017) can be summarized as under:
| Discount is given | Allowed as deduction from transaction value? |
| On or before time of supply and recorded in tax invoice | Yes |
| After supply but it was known before/at time of supply and can be linked to relevant invoice | Yes |
| Given after supply but it was not agreed upon before/at time of supply (whether or not traceable to relevant invoice) | No |
In case of supply of motor vehicles by dealers or for that purpose for any supply, discounts do not form part of transaction value. The law therefore, is very clear under the GST regime so far as taxability of discounts is concerned.
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