Article discusses Circular No. 105/24/2019-GST  dated 28-06-2019 to Understand Implications of Clarification on secondary Discounts.

Other relevant References

1. K K Polymers (AAR Rajasthan) dated 13-10-2018

2. MRF Limited (AAR Tamilnadu) dated 22/01/2019

3. UltraTech Cements (AAR Maharashtra) dated 27-06-2018

4. Polycab Wires (AAR Kerala) dated 2-03-2019

5. Circular No. 92/11/2019 dated 7-03-2019

Backdrop of the Discussion on Circular

1. This circular is sequel to Circular No. 92/11/2019 dated 7-03-2019.

2. Circular has been issued to clarify doubts on secondary discounts and issued u/s 168 of CGST Act.

3. It is crucial to examine the true nature of discount given by the manufacturer or wholesaler, etc. (hereinafter referred to as “the supplier of goods”) to the dealer

4. It would be important to examine whether the additional discount is given by the supplier of goods in lieu of consideration for any additional activity / promotional campaign to be undertaken by the dealer.

 Issue of Cash Discount dealt by  AAR Rajasthan in KK Polymers

It was held that discount allowed to customers for early payment to Del credre agent of the supplier is not supply from customer to Del credre agent and no invoice can be issued and also Del credre agent is therefore not entitled to any ITC on such discount.

Discount allowed without further obligation

It is clarified in the Circular that if the post-sale discount is given by the supplier of goods to the dealer without any further obligation or action required at the dealer’s end, then the post sales discount given by the said supplier will be related to the original supply of goods and it would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfilment of provisions of sub-section (3) of section 15 of the CGST Act.

Author’s Note:

Circular No. 92/11/2019 had already clarified as under :

In Para 2(D)(iv) It was clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.

Here it may pertinent to mention the AAR Ruling in case  of UltraTech Cements 95 289 dated 27-01-2018,which states that mere  a clause in the agreement between supplier and buyer entitling buyer  to discount without providing any determinative criteria can not be said to be in compliance to section 15(3)(b)(i) and hence value of supply shall not be reduced in respect of such discount.

It was also added that as the word ‘discount’ if left open ended or without any qualifications or criteria attached can mean there can be any percentage of discount ranging from bare minimum to even 100 per cent as per discretion of the supplier and certainly such abnormal discounts without any criteria or basis can in no way be considered as fair and at arm’s length business transactions and no taxation statute can be construed to be having open ended discount with legislative intent.

Further in Para 2(D)(v) of the Circular No. 92 it was clarified that  In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.

The above part of Circular  No. 105 appears to be worded same as Para 2(D)(iv)  of Circular 92/11/2019. But in Circular No. 105 instead of mentioning that post supply discount shall not be included in the value of supply in the hands of dealer, it is worded as “in the hands of supplier of  goods”, which appears to be misplaced.  On that grounds, Circular No. 92 was being interprated to provide albeit exemption to dealers in case of financial credit note, which has been limited in the present circular.

Discount allowed against Special Sale Drive, Ad. Campaign, Exhibition etc

However, as per Circular, 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.

Author’s Note:

1. Applying the Rule 35 , reverse calculation shall be made to compute tax liability and value of taxable service.

2.       Even where underlying goods are exempt , the discount there on may not be exempt.

Special Reduction of Price to augment Sale

It is further clarified in the Circular that if the additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume, then such additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer

This additional discount as consideration, payable by any person (supplier of goods in this case) would be liable to be added to the consideration payable by the customer, for the purpose of arriving value of supply, in the hands of the dealer, under section 15 of the CGST Act

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 in view of second proviso to sub-section (2) of section 16 of the CGST Act.

Author’s Note:

1.       Discount received from supplier = Consideration flowing from dealer to customer includible in the value of supply of the dealer u/s 15(2)(e) i.e.(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

2.       As per definition of Consideration u/s 2(31) also payment made in money or otherwise by the recipient or any other person gets taxed. Hence amount received by discount( i.e. payment made otherwise than in money) from supplier of goods instead of customer (i.e. payment received from a person than buyer) gets taxed.

3.       It also brings out that in such cases price actually paid or payable is not sole consideration and resort to valuation Rules may be required. Rule 27 may be invited where customer is unrelated person.

4.       However, where customer is an unrelated person, resort to Rule 28 shall be invited and if customer is registered person and entitled to full ITC, the invoice value shall be acceptable. To what extent the Para 4 of this Circular shall guard against such situation may be an area of discussion.

5.       Entitlement of customer to ITC is limited to the amount of tax paid. Who shall be entitled for ITC of extra amount of tax being paid by the dealer. Logically speaking, the buyer in this situation is tolerating an act of recovering lesser amount at the direction of supplier and may be covered by Para 2 ( e) of the Para 5 of 2nd Schedule and there is service supplier for supplier and hence ITC should go to supplier of goods.

6.        This also leads to further implication that while the goods may be exempt or may be taxed at different rate the amount of discount may get taxed 18%. The CBEC however has not touched this aspect in this Circular and may invite further ambiguities. The words used in the Circular that “……..additional discount would represent the consideration flowing from the supplier of goods to the dealer for the supply made by dealer to the customer………….” are not adequately supporting the contention that this is a value addition for supply by dealer to customer. Some more clarity of this aspect is impending.

Eligibility of ITC in the hands of buyer dealer in respect of financial credit note issued by the supplier of goods

Doubts have been raised as to whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial / commercial credit notes have been received by him

MRF Limited (AAR Tamilnadu) dated 22/01/2019   

It was held in this case that ITC is not available to the buyer dealer on the amount of discount enjoyed by him because to that extent consideration has not been paid by him which disentitles the proportionate ITC as per Rule 37 read with Section 16(2) 2nd Proviso.

It is clarified in the Circular that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with  second proviso to sub-section (2) of section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier.

Author’s Comments :

2nd Proviso to Rule 37:

Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.] (Inserted vide notification No. 26/2018-Central Tax, dated 13.06.2018

Section 15(2)(b)

any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both


Circular intends to say that amount of discount is payable by the supplier of goods but is incurred by the recipient by forsaking the payment by the supplier.

100% Discount allowed against goods provided by Distributors free of cost on the Instruction of Supplier (Polycab Wires (AAR Kerala) dated 2-03-2019 [2019] 104 36 (AAR – KERALA))

Kerala State Electricity Board had requested from the distributors of the Polycab Wires to supply electrical goods for the restoration of power supply at flood ridden areas. These materials are supplied by the distributors at free of cost being CSR Activity for reinstating connectivity in flood ridden areas.

The distributors raised bills to M/s. Polycab Wires Private Limited, in relation to the materials supplied free of cost to Kerala State Electricity Board. However the GST liability was paid to Government.

In the invoice so issued, the distributor had valued the goods for the purpose of tax and value was shown as discount. Held that distributors are entitled to ITC


Circular No. 105 does not lay down any new law but is mere clarification of the law and certainly improving our earlier understanding of the law and shall deeply impact the concluded or nearly finalized calculations of GST for 2017-18 also

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November 2020