Additional discount given by a company to a dealer will attract GST, says Finance Ministry

The Finance Ministry on Friday said the additional discount given by a company to a dealer in certain cases will be liable to Goods & Services Tax (GST).

The GST Policy Wing of the Central Board of Indirect Taxes & Customs (CBIC) under the Finance Ministry issued a clarification on various doubts related to treatment of secondary or post-sale discounts for applicability of indirect tax. It said where the discount is linked to specific activities to be done by the dealer such as advertisement, exhibition, etc, it would qualify as a supply by the dealer to the company and the dealer would have to pay GST.

Similarly, additional discount given for special reduced price to augment the sales will be liable to GST. According to the circular, where any reduction in prices are allowed by supplier to dealers with the condition of the same being passed on by the dealers to the end customer, it would be added to the value of supply of dealer to consumer for payment of GST.

Customers, if registered, will be eligible to claim ITC (Input Tax Credit) of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer.

Abhishek Jain, Tax Partner at EY, said the clarification on input tax credit being eligible for the full GST charged even where adjustments in value are made through financial/commercial credit notes is a welcome one for businesses. However, on other clarifications like “taxability of discounts linked with performance incentives, applicability of GST on discounts offered by manufacturers to dealers with condition of these being passed on, would obligate businesses to relook at their current tax positions and legally re-evaluate the GST positions.”

The circular further said that there will be no reduction in ITC in case of financial / commercial credit notes. 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.

According to chartered accountant Pritam Mahure, it has already been a matter of debate whether the additional discount provided post-supply to a dealer / distributor is a discount or incentive/ commission. The circular will open a Pandora's Box for various FMCG, textile, pharma companies etc as “they will have to determine whether each discount is against certain activity or generic discount (eligible for deduction).”