CBIC clarifies its stance on GST on Post sales Discount that if the post-sales discount has been given in pursuant to contract at or before the sale, GST would not be applicable on such discount however if given discount requires some action at dealer end, GST would be applicable on such discounts as a separate supply.

Applicability and impact of Goods and Services Tax (‘GST’) on sale promotion schemes has always been a complex and litigious issue. The Central Board of Indirect Taxes and Customs (‘CBIC’) had earlier issued Circular No. 92/11/2019-GST dated 7 March 2019 providing clarifications on sales promotion schemes under GST.

Read more about GST impact on sales promotion schemes – Part 1

Pursuant to the issue of the Circular on GST on Post sales Discount, the CBIC has received several representations and requests for additional clarifications from the trade and industry. The CBIC vide circular dated 105/24/2019-GST dated 28 June 2019 has attempted to clarify some aspects of the GST GST on Post sales Discount impact pertaining to secondary discounts and post-sales post-sale discounts.

The summary of the Circular on GST on Post sales Discount is given below:

1. As per Section 15(3)(b) of the Central Goods and Service Tax Act, 2017 (‘CGST Act’), discounts given after the supply has been affected would not be subjected to GST if:
   •  the 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
   • Input Tax Credit (‘ITC’) as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply

• In order to determine whether GST would be attracted or not, the true nature of discount given should be determined.  It would also be important to examine if the additional discount is provided by seller in lieu of consideration for any additional activity/ promotional campaign to be undertaken by the buyer.

• The GST impact in various scenarios is summarised below:

1. Post-sale discount by seller to dealer (No further obligation/ action required by buyer)

1. The discount is not to be included in the value of supply. 
2. However, conditions under Section 15(3)(b) of the CGST Act should be fulfilled.

2. Additional discount by seller to dealer is in the nature of post-sale incentive (Dealer to undertake special sales drive, advertisement campaign, exhibition etc.,)

1. The transaction should be considered as a separate transaction of ‘services’ by buyer to seller.
2. Additional discount by seller to be considered as the consideration for undertaking such activities by buyer.
3. Dealer should charge applicable GST on the ‘service’ to the seller
4. Seller eligible to claim ITC on the services received
5. Effectively, the value of discount to be subjected to GST albeit charged by the buyer on the seller.

3. Additional discount by seller to buyer to augment the sales volume (Seller to offer a special reduced price to dealer for passing on to end customers)

1. Additional discount by the seller to be considered as the ‘consideration’ flowing from seller to dealer for supplies by the dealer to end customers
2. As per Section 15 of CGST Act, any consideration (i.e., additional discount in this case) payable by any person (i.e., seller in this case) would be considered as the part of the value of supply
3. The ‘additional discount’ would be subject to GST and should be discharged by the dealer.
4. The customer (if registered under GST) would be eligible to claim ITC only to the extent of actual tax paid (As per second proviso to Section 16(2) of the CGST Act)

4. GST adjustment through financial/ commercial credit notes (GST portion not reduced)

1. It has been clarified earlier that the seller can issue financial/ commercial credit notes to the dealer, but is not eligible to reduce the original tax liability.
2. The dealer is also not required to reverse ITC attributable to the GST already paid on such post-sale discount as the GST is incurred by the buyer for which the seller was liable (As per exception carved in the second proviso to Rule 37(1) the CGST rules) i.e. being an amount incurred by the recipient of the supply which the supplier was liable.

5. Conclusion

This Circular has far-reaching implications on various businesses offering post-sales and secondary discounts.  Business should review their agreements with dealers and customers to examine if additional consideration by way counterparty obligations, deep discounts, volume-driven price adjustments etc. are covered in the agreements and evaluate the impact of such transactions under GST.