Background
Although with the advent of E-commerce, the distance between a manufacturer and an end consumer is reducing day by day, however, the age-old system of a supply chain consisting of manufacturers, depots, stockiest, distributors, wholesalers, retailers etc. is still in existence.
As a result, if the manufacturer wishes to increase his business, then every participant in the supply chain needs to be given various benefits which include discounts, incentives of gazillion kinds etc. Due to these benefits, the supply chain participants improvise their performances which increases their sales which eventually helps the manufacturer to increase his business.
With the above background, in this article, an attempt has been made to understand the GST impact of such discounts and incentives.
Legal Provisions
Before averting to the practice of giving incentives/discounts and their tax treatments, let us understand broadly, the provisions of the GST Act[1] involved in the subject matter which is as follows:
- Section 9(1) of the GST Act provides GST to be a levy on the supply of goods and services. Section 7(1) of the GST Act provides that supply includes all forms of goods or services. Section 2(102) of the GST Act has defined services to mean anything other than goods, money and securities.
Under the erstwhile Finance Act, 1994, services meant activities performed for consideration. However, under GST, such linkage is missing from the definition of service. Nevertheless, vide Circular No. 178/10/2022-GST dated 03 August 2022 CBIC has clarified that the element of the contractual relationship, where one supplies goods or services at the desire of another, is an essential element of supply.
On a conjoint reading, it transpires that for a levy of GST, there has to be an agreement for a supply to be made for consideration.
- Further, once a supply has been identified to have been made for consideration, the value at which GST would be payable is determined in light of Section 15 of the GST Act.
As per Section 15(1) price paid or payable for the supply is the value of the supply. Further, as per Section 15(3)(a), discounts reflecting on the invoice are deductible from the value of the supply. Furthermore, as per Section 15(3)(b), discounts are allowed after effecting the supply if [1] such discounts are established in an agreement before the time of supply, [2] the discount is specifically linked to the relevant invoice and [3] ITC has been reduced w.r.t. such a discount.
Application of legal provisions to discounts and incentives
In light of the above provisions, let us understand the difference between sales incentives and discounts.
Discounts: – In modern business, discounts could be given for n number of reasons. However, subject to the test of sole consideration, any discount is allowed to be deducted from the taxable turnover on the following basis;
- If it is given before or at the time of supply, it should be recorded on the tax invoice;
- If it is given after the supply, [1] if such a discount is established in an agreement before the supply and [2] if ITC has been reduced.
The first type of discount is deducted from the invoice and the second type of discount is passed through the credit notes subject to the provisions of Section 34 of the GST Act.
Incentives: – Incentives could further be bifurcated into two parts viz.;
- Promotional incentives: – These incentives are given to compensate for additional advertisement and marketing activities carried out by the supply chain participants at the behest of the manufacturer. For example, the manufacturer may ask all the distributors to arrange marketing exhibitions or the manufacturer may ask the distributors to put on his advertisements etc.
It is apposite to note that in this case, the distributors are doing additional activities at the behest of the manufacturer. In exchange for such activities, the manufacturer is giving incentives to the distributors. Thus, this case involves a contractual relationship of doing certain activities in exchange for consideration which is a service leviable to GST.
- Volume-based incentives: – Incentives given to distributors when they achieve certain targets. For example, an incentive of 2% is given on the achievement of a specific sales target.
It is apposite to note that in this case, there is no additional activity being performed by the distributor for the manufacturer and as per the above circular, in the absence of any contractual relationship between the manufacturer and a distributor qua the incentive, there is no supply hence, GST is not payable on incentive. The same principle has also been upheld under the erstwhile regime in Commissioner vs Sai Service Station Ltd[2]. and Sharyu Motors vs Commissioner[3].
Additionally, the distributor is selling goods on his own account. The incentive being earned by the distributor for selling a high volume of goods is merely an end result of the sales activity which he is performing for himself. In light of this, it is apposite to note that no tax could be leviable on the end result of an activity. As has been upheld in a ruling from the Netherlands Appellant Tribunal in the case of Fiscal Unity (ECLI:NL:GHARL:2023: 4481). Thence, GST would not be leviable on incentives received on this ground as well.
Moreover, the activity of selling a higher quantum of goods would yield profit to the distributor. Hence, any activity done by him to boost his sale would be self-service. In light of this, it is apposite to note that as per the doctrine of mutuality, a person cannot supply a service to oneself. Hence, the incentives would not be leviable to GST.
Nevertheless, if the manufacturer agrees to pay an incentive on higher sales volume then such incentive is merely a condition to a contract and as GST is leviable on consideration to a contract, incentive arising out of condition to contract would not be leviable to GST. See Commissioner of Service tax vs Repco Home Finance Limited[4].
Basis the above, it becomes ostensibly clear that incentives received without performing any contractual obligation would not be leviable to GST.
The above treatment of incentives also finds support in a clarification given by Singapore VAT in GST: Guide For Retailers (Fifth Edition) wherein it has been clarified that if an incentive [rebate] is given owing to an increase in sales volume, such rebate is in the nature of discount whereas an incentive [rebate] given for performing additional activities is a consideration for the supply of marketing services and is leviable to GST. A similar view has also been clarified by the Australian Tax Office[5].
Conclusion
Recently, in an AAAR pronounced in the case of MEK Peripherals India Private Limited,[6] it has been held that incentives given to achieve sales targets are a service leviable to GST. However, in light of the above analysis, such incentives cannot be taxed owing to multiple reasons. Nevertheless, with the GST department being adamant to advance rulings, the businesses are surely going to face some music from DGGI or audit departments. However, such businesses may not give up on the matter as the view taken by such a ruling may not stand the test of judicial scrutiny.
Notes:-
[1]Central Goods and Services Tax Act, 2017 read with State Goods and Services Tax Act, 2017
[2]2014 (35) STR 625 (Tri.-Mumbai)
[3]2016 (43) STR 158 (Tri-Mumbai)
[4]2020 (42) GSTL 104 (Tri.-LB)
[5]https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/GST-and-rebates/?anchor=Howtoapplyyourrebate#Howtoapplyyourrebate
[6]Order No. MAH/AAAR/DS-RM/04/2023-24 dated 13 June 2023
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(Authored by CA Pooja Jajwani, the author could be reached at [email protected]. The author thanks CA Ashish Chaudhary for inspiring her to write this article.)
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