Post Sales Discount -Withdrawal of Circular No. 105/24/2019-GST dated 28.06.2019 vide Circular No. 112/31/2019–GST dated 3rd October, 2019
Background of the issue:
To settle the haze surrounding on treatment of post-supply discounts under GST, the CBIC issued a Circular No. 105/24/2019-GST dated June 28, 2019 (“Circular 105”) captioned “Clarification on various doubts related to treatment of secondary or post-sales discounts under GST”. This Circular was issued pursuant to various representations submitted by the trade and industry seeking clarifications in respect of tax treatment in cases of secondary discounts or post sales discount, after Circular No. 92/11/2019-GST was issued on March 7, 2019 (Clarification on various doubts related to treatment of sales promotion schemes under GST).
The indirect tax board had removed a “controversial” circular that imposed goods and services tax (GST) on post-sale discounts by dealers, but it has done little to clear the confusion around the many issues that arose with the circular.
In June, the Central Board of Indirect Taxes and Customs (CBIC) had issued a circular which said that dealers will have to pay 18 per cent GST on the post-sale discount that they get from the suppliers of goods, if the supplier asks them to pass on the concessions to the end consumer. The circular came out with different situations where GST should be paid and where it should not.
Analysis and Argument:
For instance, imagine that a company sells a car to a dealer for Rs 10 lakh and later gives a discount of Rs 50,000. In doing so, the firm did not put any obligation on the dealer to pass on the benefit. So, the dealer need not pay any GST on Rs 50,000. However, if the company asks the dealer to pass on the benefit to the customer, then the dealer has to pay GST on the entire amount, including Rs 50,000.
The Confederation of Indian Industry (CII) had said this had irked industry, particularly the auto sector, which has already been reeling under the pressure of subdued demand. this circular violated the cardinal principle of GST that the tax cost is to be borne by the ultimate consumer.
“This principle means that the supply of goods or service should suffer the tax only to the extent of consideration paid by the ultimate consumer,” the CII had said, demanding that this provision in the circular be changed. It said additional discounts are generally given to liquidate the old inventories or push products under weak market conditions.
Following the hue and cry, the CBIC recently said: “Numerous representations were received expressing apprehensions on the implementation of the said circular. In view of these apprehensions… the Board… hereby withdraws, ab initio, the circular.”
But even after the withdrawal of the circular, the controversy over it has not ended. Experts demanded that a clarification be issued that there would be no GST on post-sale discounts.
Amongst other clarifications, following was mentioned as regards secondary or post-sales discounts under GST:
If the additional discount given by the supplier of the goods to the dealer is the post-sales 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 subject to GST. To augment the sales, the manufacturer gives a special discount in the form of reduced price by the dealer to customer. Such an additional discount represents the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to consumer and hence, is subject to GST. Rigorous Representation before concerned Authorities by Mr. Bimal Jain: In view of the above factual background, it was represented before the concerned authorities requesting their kind consideration on the below mentioned issues/concerns, leading to severity of post-sale discount conundrum: Passing additional discount by manufacturer/ supplier to the dealer is a pure financial transaction rather than being a ‘supply. By offering an additional discount to sell the product, the dealer or the manufacturer did not supply any goods or any extra services so as to make it chargeable to GST. The entire idea of Circular 105 may have found justification where two dealers are not in a relationship of ‘supplier’ and ‘receiver’ for those particular goods on which discount is being given. But where the supplier has sold certain goods to the dealer, at first place, and then, some additional discounts are given to the same dealer and on the same underlying goods, then, it appears cryptic to treat this discount as an addition to the sales price of the dealer on subsequent transaction of sale to customers, rather than treating the same as discount on base transaction. Equating ‘discounts’ with ‘consideration’ goes contrary to essentials of Indian Contract Act, 1872. The act of supplier giving a discount to the dealer to pass on the same to the end customer will not qualify as ‘consideration’ from the customer, since the amount has not been specified in the contract entered between dealer and customer. Even the ‘additional discount’ does not fit within the four corners of term ‘consideration’ as defined in GST law. Including the amount of additional discount in value of supply by dealer to customer will negate the benefit of reduced prices to customer. Ultimately, the value of supply will be higher and how would the customer get the benefit of the reduced price? No clear parameters to determine whether “action is required” at dealer’s end. If the tax burden is ultimately to be borne by the supplier himself, then how the transaction will be routed? Further, what would be the point of taxation in such cases? How to determine the correct point in time when the dealer is required to deposit GST on the amount of additional discount? Break in input tax credit (“ITC”) chain and double hit on manufacturers – reduced prices of commodities along with additional tax burden (non-creditable) on a value which is not even realized.
GST Council decides to rescind Circular 105, ab-initio: In the light of matter being represented with the CBIC and GST Council, the GST Council in its 37th meeting held on September 20, 2019 has recommended to rescind Circular 105, ab-initio.
Legal Provisions (Sec 15(3) of the CGST Act 2017):
Amount of discount can be reduced for charging GST in the following circumstances:
However due to ambiguity in the provisions and decisions of AAR there was need for clarifications on Post Sales discount offered by the supplier by CN with respect to
> Whether supplier is required to reverse his GST liability to the extent of discount offered?
> Can supplier issue FCN without GST?
> Whether customer/dealer is required to reverse ITC, if FCN is issued by supplier in terms of second proviso to Sec 16(2) of CGST Act 2017?
The said issues were examined by Govt. and clarified vide C.B.I.&.C. Circular No. 105/24/2019-GST dated 28.06.2019
A. Discount without any obligation on the part of dealer:
Supplier in such case issue CN with GST and dealer is required to reverse the ITC.
B. Discount with some obligation on the part of dealer:
Here the dealer, being supplier of services, would be required to charge applicable GST on the value equal to the amount of discount received and the supplier of goods being recipient of services, will be eligible to claim ITC, of the GST so charged by the dealer.
C. Discount by supplier to offer price reduction by dealer to customer:
The customer if registered would be eligible to claim ITC of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer as per second proviso to Sec 16(2) of CGST Act 2017
D. Discount by way of FCN:
Now Govt. has clarified that dealer will be eligible to take ITC of the original amount of tax paid by him to the supplier of goods and he will not be required to reverse proportionate ITC attributable on such post sale discount received by him through issuance of FCN by the supplier of goods.
However, due to suspicion and to ensure further uniformity in the implementation of the provisions of the law across field formations, the Board decided to withdraw clarification given vide C.B.I.& C Circular No. 105/24/2019-GST dated 28.06.2019.
Withdrawing the above circular does not put end to ongoing post-sale discount conundrum. In the interest of ease of doing business and to ensure no litigation on this issue in future, concept of commercial/ financial credit note (without GST) must be applied uniformly to all such scenarios of post-sales discounts, falling short of the conditions as mentioned under Section 15(3)(b) of the CGST Act. It is needless to mention that the CBIC itself has accepted the concept of a commercial/ financial credit note (without GST) in its earlier circular dated March 7, 2019 and FAQs, which was reiterated in impugned Circular 105 as well.
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