Post Sale Discounts & Incentives: GST Implications & Treatment

Discounts and incentives play a significant role in trade practices, encouraging sales and promoting products or services. This article explores various forms of discounts, specifically post-sale discounts or incentives, and their implications for the Goods and Services Tax (GST). We will delve into different scenarios, including whether discounts are treated as part of the original supply or considered separate supply transactions.

The article discusses common types of discounts, such as general trade discounts, cash discounts, volume discounts, target incentives, rate differences, reduced prices, and target-based non-monetary incentives. It further explains the provisions under Section 15(3) of the CGST Act, which governs the treatment of discounts at the time of supply and post-sale discounts.

The analysis emphasizes the importance of fulfilling specific conditions to exclude post-sale discounts from the value of supply. These conditions include having an agreement before the supply, linking the discount to a specific invoice, and reversing the input tax credit related to the discount.

Additionally, the article examines a crucial aspect of whether discounts and incentives should be considered as consideration for a separate supply transaction. It refers to relevant legal cases, including a Supreme Court ruling on commission/incentives received by an air travel agent.

It’s a common trade practice to offer Discounts to customers. Some of the common forms of Discounts offered are as under-

1. General Trade Discount – Such type of discounts is offered before the supply is affected and the same is recorded in the invoice at the time of issuing bills.

2. Cash Discount – It is offered for making payment before the agreed upon credit period.

3. Volume Discount – Such types of discounts are offered on both purchases and sales. For eg. An authorised dealer of vehicles is offered discount when he purchases more than the limit fixed on regular purchases. Similarly, when he sells more than the targeted sales of vehicles for a given period, he is offered discount, which is termed as Volume Discount.

4. Target incentive– It is similar to Volume discount. Incentive is paid mostly for achieving qtly/ half yearly/ yearly targets set, wherein incentive is usually given on the value sold.

5. Rate difference – Such type of discounts is given normally for sale of commodities like cement, wherein, due to the highly competitive and dynamic market conditions, the prices keep changing almost on daily basis and whereby the dealers/ stockists have to sell the goods at prices lower than the purchase price. The manufacturer pays some compensation to the stockists to compensate them for the loss incurred to some extent. Such time of compensation is termed as “Rate difference”.

6. Reduced Price – Discount is given by the supplier of goods to the dealer to offer a special reduced price to the customer.

7. Target based non–monetary incentives – for eg. as part of sales promotion, the manufacturer, offers pressure cooker to the stockists/ dealers for achieving the target of sale of 1,00,000 packets of Agarbatti.

Sometimes, the discount/ incentive is also given with some obligation on the part of the dealer requiring him to do some act like undertaking special sales drive, advertisement campaign, exhibition etc. for the supplier of goods/ services.

The discount so given could result in two scenarios- One, as to whether the discount is to be treated as part of the originally supply or otherwise; Second, as to whether the discount is to be treated as a consideration for the activities undertaken by the dealer/ stockists .., fulfilling the criteria prescribed for falling within the scope of ‘Supply’ under Sec 7 of the CGST Act.

WHETHER DISCOUNT IS TO BE TREATED AS PART OF ORIGINAL SUPPPLY

The provision for the first scenario has been laid down under Sec 15(3) of the CGST Act, which reads as under-

15(3) The value of the supply shall not include any discount which is given—

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after 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 document issued by the supplier has been reversed by the recipient of the supply.

The above provision caters to two types of discount- 1)Discount at the time of supply and 2)Post Supply Discount.

DISCOUNT AT TIME OF SUPPLY [Sec 15(3)(a)] –

These are the General Trade Discount offered at the time of sale and the discount is recorded on the invoice itself. There is no dispute in respect of such type of discount, as in terms of the said provision, the value of supply shall not include the discount component which is recorded on the invoice itself. In any case, the net value of the goods also becomes the transaction value for the supplier.

POST SALE DISCOUNTS [Sec 15(3)(b)] –

Perusal of the provision- Sec 15(3)(b) reveals that for the discount component to be excluded from the value of supply, three conditions need to be fulfilled-

i) The supplier and buyer must have entered into an agreement, before the time of supply, containing the provision for the discount.

ii) The discount is linked to a specific invoice.

iii) Input tax credit attributable to the discount must be reversed by the buyer or the recipient of the supply.

The implication of the above provision can be illustrated by an example-

Let’s say, a manufacturer of pen drives enters into an agreement on 25^th March 2022 with an appointed dealer for sale of 5000 pen drives for Rs.35,00,000/-. As per the terms of the agreement, if the dealer is able to sell the entire items within 6 months, the dealer is entitled to a discount of 10% of the value of supply. The manufacturer supplies the pen drives on 31.3.2022 by raising an invoice no. 100/2022 dated 31.3.2022 for sale of 5000 pen drives for Rs.35,00,000/- + GST @18%. The dealer avails the ITC of Rs.6,30,000/- in the month of March 2022. The entire payment due against the said invoice amounting to Rs.41,30,000/- including GST amount of Rs.6,30,000/- is paid by the dealer before the credit period of 3 months. The dealer is able to achieve the target set within 6 months. The manufacturer raises a credit note on 5.10.2022 for the 10% discount amount of Rs.3,50,000/- + GST amt of Rs.63,000/-, totalling to Rs.4,13,000/-, giving reference to the specific invoice no.100/2022. The dealer reverses the ITC amounting to Rs.63,000/-.

In the above given example, all the 3 said conditions are fulfilled. Thus, in terms of the provision of Sec 15(3)(b), the value of supply shall not include the discount component. The manufacturer is therefore entitled to claim deduction of the discount amount of Rs.3,50,000/- from the value of supply in the month of Oct 2022 and thereby reducing his output tax liability to the extent of Rs.63,000/- for the said month. In the instant case, if instead of issuing credit note in terms of Sec 34(1), the supplier issues financial/commercial credit note without considering GST component, then, naturally, tax liability pertaining to the credit note amount cannot be adjusted by the supplier. Consequently, as ITC of the said tax component is not required to be reversed by the dealer, the provision of Sec 15(3)(b) not having been fulfilled, the discount component cannot be deducted from the value of supply by the supplier.

In the same example, lets hypothetically assume that there is no provision in the agreement with regard to discount or that the supplier could not establish that there was any prior agreement regarding the offer of discount, then it could be said that the conditions of Section 15(3)(b) are not fulfilled and thereby the discount component is to form part of the value of supply. In other words, the discount component in such case also cannot be deducted from the value of supply for the purpose of discharging GST liability. As regards issuance of credit note is concerned, ideally, in such a situation too, financial/ commercial credit note needs to be issued as a commercial transaction between the two contracting parties, as also clarified vide para 2D) of Circular no.92/11/2019-GST dated 7^th March 2019. In case, credit note has been issued under Sec 34(1) of the Act, then the supplier is not supposed to claim deduction of the said discount component from the value of supply and thereby no reduction in output tax liability. If credit note, in the instant case, is issued after 30^th Nov 2022 (the time limit prescribed under Sec 34(2) for issuance of credit note for the purpose of adjustment of tax liability), it also has to be dealt with similarly.

In an interesting advance ruling in the case of Ultratech Cement Ltd. given on 27.6.2018 by Maharashtra Advance Ruling Authority, the wordings of Sec 15(3)(b) (i) has been interpreted to mean that the quantum of discount, as required to be established in terms of the agreement entered into at or before the time of such supply and specifically linked to relevant invoices, cannot be open ended not based on any criteria. The supplier of goods has to clearly mention the quantum of discount or percentage of discount which is to be worked out on the basis of certain parameters or certain criteria which may be agreed to between the supplier and the recipient and which are pre-determined and mentioned in the agreement in respect of the supply of the goods.

WHETHER THE DISCOUNT/ INCENTIVE IS TO BE TREATED AS CONSIDERATION FOR A SEPARATE SUPPLY TO THE SUPPLIER

We may first begin with the clarification given by CBEC in the matter, vide Circular no.105/24/2019 dated 28.6.2019. This circular was withdrawn vide Circular no.112/31/2019 dated 3.10.2019 and the reasons given for withdrawal was to ensure uniformity in the implementation of the provisions of the law across field formations, which is quite perplexing, as to how by withdrawal of the circular, without giving further clarity on the matter, could bring about uniformity in implementation of the provisions of law. However, the fact remains that the ratio laid down in the withdrawn circular, that if the discount/ incentive is given for undertaking any activity that falls within the scope of supply as laid in Section 7 of the Act, then instead of treating the discount as a Trade discount, the same is to be considered as a consideration in lieu of a separate supply transaction, is on sound logic and legally sustainable. It’s of importance, therefore, to ascertain whether the said discount is relatable to any supply activity. One of the relevant clarifications laid down in the said withdrawn circular is as under-

“If the additional discount given by the supplier of goods to the dealer is the post-sale incentive requiring the dealer to do some act like undertaking special sales drive, advertisement campaign, exhibition etc., then such transaction would be a separate transaction and the additional discount will be the consideration for undertaking such activity and therefore would be in relation to supply of service by dealer to the supplier of goods. The dealer, being supplier of services, would be required to charge applicable GST on the value of such additional discount and the supplier of goods, being recipient of services, will be eligible to claim input tax credit (hereinafter referred to as the “ITC”) of the GST so charged by the dealer.”

If the obligation to undertake activities, as above, amounts to a separate transaction of ‘supply of services’, in terms of Section 7 of the Act, then the discount cannot be related to the first activity/ transaction of supply of goods. Consequently, neither the supplier of goods is entitled to claim deduction of the discount component from the value of supply nor is the recipient required to reverse the ITC attributable to the discount component, as such transaction is not hit by the provision of Section 15(3)(b). On the other hand, the recipient i.e the dealer is liable to discharge GST on the value of such discount treating it as consideration for the supply transaction and the supplier is eligible to claim ITC of the GST so charged by the dealer. The point to be noted here is that since the activity undertaken by the dealer amounts to supply, he is supposed to raise an invoice in terms of Section 31 for the said discount amount and charge applicable GST, which will entail the availment of ITC by the supplier of the GST so charged.

But the vexed issue here is whether the discount given by the supplier of goods is in lieu of consideration/ incentive for any additional activity/ promotional campaign to be undertaken by the dealer (the recipient of the supply of goods), fitting into the scope of supply as laid down in Section 7 of the Act.

Let’s discuss one such ruling given by the Advance Ruling Authority wherein the issue was not only whether the incentive can be treated as discount to be eligible for deduction in terms of Section 15(3)(b) or whether the discount can be treated as consideration for a separate supply, but also, regarding the situation wherein the discount is not offered by the supplier. Reference is to an advance ruling dated 13.6.2023, given in the case of MEK Peripherals India P Ltd. by the Maharashtra Appellate Authority for Advance Ruling. The facts of the case are that the applicant- MEK Peripherals purchases Intel products from various Distributors, who imports goods from “Intel inside US LLC” [IIUL]. The applicant further sells it to various retailers. The applicant enters into an agreement with IIUL under Intel Authorised Components Suppliers Program that the applicant will receive a non-binding Plan of Record Target (POR) [it may be noted – the agreement is not with the distributor who supplies the goods to the applicant, rather it is with the exporter of the goods/ the manufacturer of the goods, who supplies the goods to the distributor]. Under the POR the applicant will have an opportunity to earn certain incentive as a percentage of performance to quarterly goal on eligible Intel products.

The ruling was sought on, as to – i) whether Incentive received from IIUL can be considered as a Trade Discount and ii) if not considered as a Trade discount, then whether it is a consideration for any supply. The appellate authority held as under-

1. For the incentives to qualify as a Trade Discount, an agreement between the seller and the purchasing party is a pre-requisite, the same is missing between the distributor and the applicant. Thus, the incentive received from the manufacturer is different from the transaction undertaken by the applicant with the distributors. Thus, the incentives received from IIUL is not a Trade Discount.

2. The incentives accruing to the applicant is not in the form of Trade Discount but in the form of supply of marketing as well as technical services (relying on the terms of the said agreement).

The above ruling appears to be on a proper footing as there is a separate transaction for supply of services and the incentives received is to be treated as consideration for the said supply of services, as there exists a separate / distinct ‘supplier-recipient’ relationship. However, not every case scenario can be put in a compartment, as in the above ruling case. It is noticed that the term ‘discount’ and ‘incentive’ are interchangeably used and in some cases, such discounts are actually, normally offered as a Post Sale Incentive so that the dealers undertake the promotional activity for promoting the goods of the supplier as referred to in the above referred circular. So, it needs to be understood as to what is meant by the term- ‘Incentive’.

Recently, on the matter of leviability of S.Tax on Commission/ Incentive received by  an Air Travel Agent, the Hon’ble Supreme Court, in the case of Pr. Commr. of C.Excise, Delhi-I vs. SOTC TRAVEL SERVICES P LTD. [(2023)6 CENTAX 160 (SC)] vide order dated 15.5.23, held that the commission/ incentive received by travel agent is not liable to S.Tax under ‘BAS’, relying on the LB decision in the case of Kafila Hospitality and Travels (P.) Ltd. v. CST – 2021 (47) G.S.T.L. 140 (Tri. -LB)], which was also relied upon in the appealed Tribunal decision, on the ground that the said LB decision has not been challenged by the department.

The issue involved in the said case was as to whether, the assessee, operating and discharging service tax as an ‘Air Travel Agent’ is liable to pay service tax under the head Business Auxiliary Service (BAS) on receipt of commission/incentive from CRS companies (computer reservation service) and on Performance linked bonus (PLB) from the Airlines.

The said IATA agent receives commission from airlines on which service tax is being discharged on the basic fare value of the ticket. In some cases, airlines also provide incentives/PLB to the agents if number bookings are achieved or target met. Similarly, CRS companies also offer incentives/ PLB to the agents against achieving of pre-defined bookings using their database for making reservations.

It’s the contention of the department that such incentives/PLB are liable to service tax under ‘BAS’ on the grounds that they are promoting and marketing the business of the airlines and the CRS companies as the case may be.

Relying on the said LB decision the appeal filed was allowed holding that incentives paid for achieving targets cannot be termed as ‘consideration’ and therefore not leviable to S. Tax.

A close look into the ratio of the LB decision in the case of Kafila Hospitality and Travels (P.) Ltd., reveals the following main grounds on which its decision is based on-

1. For an activity to be considered as promotional, it is necessary that a service provider must “promote” or “endorse” the service of the client. The fact reveals that the air travel agent is only providing options to the passengers and is not promoting any particular airline.

2. The commission paid to the airline’s agent had a direct nexus to the ‘air travel agent’ service rendered to the passengers, even if it indirectly benefited the business of the airlines.

3. For an activity to qualify as ‘promotional’, the person before whom the promotional activity is undertaken should be able to use the services. The passenger cannot directly use the CRS software provided by the company to book an airline ticket. It cannot, therefore, be said that a travel agent is promoting any activity before the passenger.

4. A travel agent is free to choose any CRS system.

5. If the audience of an alleged promotional service is unaware of the service of the client, no “promotional or marketing services” can be said to have been provided. The passenger cannot be deemed to be an audience for promotion of the business of CRS companies, for the passenger can neither book directly through a CRS company nor can a passenger be influenced by any travel agent to book through a particular CRS company.

6. Mere selection of software or exercising of a choice would not result in any promotional activity. The Department has not pointed out at any ‘activity’ undertaken by an air travel agent that promotes the business of the CRS Company.

7. The services in question are booking of airlines tickets and for achieving a pre-determined target, the air travel agent also receives an additional amount in the form of incentives/commission from the airlines or the CRS Companies. The receipt of incentives/commission would not change the nature of the services rendered by the travel agent.

8. The air travel agent is, by sales of airlines ticket, ensuring promotion of its own business even though this may lead to incidental promotion of business of the airlines/CRS companies.

9. ‘Incentives’ are generally given to encourage performance of a party. The factual reveals that incentives have been paid by the airlines or CRS companies to travel agents when they achieve a pre-determined target of sales.

Based on the above reasoning it was held that incentives received by a service recipient from a service provider cannot be subjected to service tax.

It could be argued that the above SC decision is pertaining to Service Tax era and that too for the period prior to 2012. However, it appears that the ratio laid down as far as the interpretation of the term ‘incentive’ is concerned will be equally applicable in the GST era and this case law will definitely find itself being discussed/ deliberated upon in future representations before the adjudicating and appellate authorities in such cases.

Thus, to conclude, in cases where promotional activity being incentivised is the issue involved, then the ratio laid down in the above referred Apex Court decision could be used as a test base to ascertain whether such Post Sale Incentive amounts to a separate supply activity, in most of the cases.