By Ritesh Kanodia
& Meetika Baghel
When you hear the word ‘discount’, the first thing that comes to mind is the ‘flat 50% off’ sticker. But, what if the shopkeeper tells you that even if the product price of Rs 100 is available for Rs 50, you’d have to pay GST on Rs 100. Sounds ridiculous, but this is exactly what the new GST circular (No. 105/24/2019), dated June 28, 2019, intends to do.
The government recently issued two circulars—No. 92/11/2019 GST, dated March 7, 2019, followed by the June Circular—to elucidate the provisions contained under section 15(3)(b) of the Central Goods and Services Tax Act, 2017, and which post-sale/secondary discounts merit consideration under said provisions. The March Circular went on the premise that secondary discounts, where the supplier reduces the value of goods, initially supplied to the buyer, at a later stage (post-supply), are typically unknown to buyers, and they would not warrant deductions under the law. The March Circular led to more questions than clarity, and so the June Circular was released that evaluated scenarios known to be covered under the concept of post-sale/secondary discounts and their treatment under section 15 of the Act.
The June Circular starts by stating that before concluding on the deductibility of a discount, it is crucial to examine the true nature of the discount extended by manufacturers and suppliers to dealers. From there, it goes on to suppose that where such discounts are towards additional activity to be undertaken by the dealer or promotional campaigns, such reduction in prices (though called discounts) would not be permissible to be deducted from value of goods for the purpose of tax payment, and instead would qualify as a separate supply by the dealer to the supplier. The second part of the Circular clarifies that additional discounts extended by manufacturers to dealers that are passed on by the dealer to end-customers would form part of consideration of dealer for payment of GST.
The June Circular para 3 presumes that in a transaction of sale between the manufacturer and dealer, there is another transaction of service between the dealer and manufacturer that becomes liable to separate GST, thereby denying the benefit of section 15(3)(b) of the Act (the section stipulates that the value of supply shall not include any discount that is given after the supply has been effected, if such discount offered is established in terms of an agreement entered into, at or before the time of such supply and specifically linked to relevant invoices, and input tax credit has been reversed by the recipient).
The June Circular has failed to understand the business realities of how marketing schemes operate. The philosophy of post-sale discounts is centred around the fact that the manufacturer wants the dealer to fulfil certain set of conditions before discounts (sometimes called as incentives) can be offered. Hence, it is unclear how fulfilling those set of conditions can lead to a separate service transaction between the dealer and manufacturer. The provisions aforesaid do not delve into the purpose of the discount and what is sought to be achieved by extending such discounts. In fact, all discounts, by whatever name, are intended towards promotion of goods/services and to achieve the goal of higher sales. The June Circular fails to acknowledge the fact that the advertisement/sale campaigns are aimed towards boosting product sales of both the manufacturer and dealer. Thus, all such promotional activities undertaken by the dealer are equivalently applicable to the dealer’s sales. These activities are yardsticks that the manufacturer uses to determine the quantum of discounts to be extended to dealers and cannot be considered as a separate consideration that flows from manufacturers to dealers. Thus, the entire basis of the June Circular appears to be legally flawed and will only lead to unjustified demands by the revenue authorities. This issue has been tested under the erstwhile law in the case of Sai Service Station Limited vs Commissioner of Service Tax, Mumbai, wherein it was held that incentives and loyalty bonus received by car dealers from car manufacturers was not in the nature of business auxiliary services of sales promotion and hence not liable to service tax.
The second part of the Circular states that additional discounts passed on by the manufacturer/supplier of goods to the dealer, which they are required to pass on to the customer by way of special reduced price, would constitute a consideration paid by the manufacturer/supplier to the dealer for supplies made to the consumer. The Circular concludes that discount passed on by the supplier is in the form of a third-party consideration paid for sales made by the dealer to the consumer and hence GST is required to be discharged on the value charged by the dealer and the additional discount given by the supplier (to the consumer).
Section 15 of the Act provides that “the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.” The concept of transaction value, in a way, establishes the concept of privity of contract between the supplier and buyer, whereby if two parties are not related and have contractually agreed for a price to be paid and there is no additional consideration between the parties, then such price ought to be considered as the transaction value. All commercial relationships are governed by the contractual understanding between the parties, invariably the contract between the dealer/retailer and the end-consumer in such instances would specify the value for the goods at the reduced price (after considering additional discount).
Once the sale fructifies, the dealer may be entitled to claim reimbursement of the additional discount extended from the manufacturer/supplier, thereby bringing the down the value of goods in the supply chain. The June Circular, in effect, violates the concept of transaction value and draws a presumption that the discount received from the manufacturer is an additional consideration agreed to between the dealer and the customer. This is irrespective of the fact that there is no privity of contract between the end-customer and the manufacturer. The mere receipt of monies by the dealer from the supplier would not alter the transaction value of the supply of goods by the dealer to customers.
The June Circular errs in presupposing, between the dealer and consumer, a value that does not exist (due to the extension of additional discount) and also by refusing the reduction in value to the supplier, even in a situation where parameters of section 15(3)(b) of the Act are clearly met. The current valuation provisions do not specifically contemplate any such additions to the value of supply by the dealer to the customer for the purposes of charging GST. Thus, the clarification under the June Circular lacks the force of law and is beyond the provisions of the Act. Further, the June Circular states that the consumer will not be entitled to Input Tax Credit (ITC), but forgets to anticipate that under all circumstances it’s the consumer who will be bearing the brunt of the additional tax being charged by dealers. At one end, anti-profiteering laws require that the benefit of reduced price should be passed on to the end-customer, but a dichotomy is also being created by penalising the manufacturer/dealer who would want to ensure that the end-customer gets advantage of the discount schemes offered by them! Also, the denial of ITC to the consumers is clearly against the principle of equal treatment.
The June Circular has unsettled what was more or less settled. The clarification issued is likely to have wide ramifications and could be applied by the revenue authorities to all situations where a benefit is being given by the manufacturer, whether by way of discount or otherwise.
Kanodia is partner and Baghel is principal, Dhruva Advisors