GST: Post-supply discounts or distress?
Considering the fact that the full amount of GST as applicable on the original transaction value remains paid to the government, there is no revenue loss to the exchequer.
With the advent of the GST regime in India in 2017, indirect taxes have become a part of all critical discussions in board rooms for India Inc. Since then, frequent amendments in the GST law and upgrades in IT infrastructure have been two constant features of the new regime. Nonetheless, various facets of the GST law still require clarity for enabling the ease of doing business. One such aspect which has been a constant topic of discussion, is the tax treatment of post-supply discounts offered by suppliers and eligibility to claim input tax credit (ITC) thereof.
In many instances, seller may agree to offer a price reduction in respect of its supplies made in the past owing to commercial reasons. These discounts are often used as year-end/ target-based incentives, promotion schemes for incentivising stakeholders in the supply chain. Offering such post-supply discounts as an adjustment to the original transaction value has been an established business practice which was also well recognised by the tax laws as interpreted by the Courts. Characterisation of post-supply discounts was never a point of debate under the erstwhile laws.
A recent view of the GST authorities is that post supply discounts are in the nature of price for services rendered by distributors/ retailers. However, post supply discounts have always been understood to be in the nature of 'price reduction' by the original supplier to the distributors/ retailers. However, the view being taken by the GST authorities seems out of place. In certain cases where the original supply is exempt from the levy of GST (for instance, milk, fresh food, sanitary napkins), viewing post-supply discounts as an independent taxable supply by the wholesaler/ retailer would swell the GST cost in the supply chain. Hence, this view does not seem to be in conformity with the lawmaker's intent.
Furthermore, the credit in respect of post-supply discounts is also in jeopardy. GST laws provide that GST is not required to be paid on any discounts including post supply discounts by way of GST credit notes. Additionally, through a recent GST circular, it has been clarified that a supplier has an option to issue commercial credit notes for offering post-supply discounts without altering the tax liability. As a result, while the tax liability remains as is, the value of supply would stand reduced.
However, the circular does not clarify the eligibility of the buyer to claim credit of the GST incurred on the value of post-supply discount. It is noteworthy that the GST laws provide that a recipient would be required to reverse the input credit claimed if there is failure on account of non-payment of value of supply and tax within a stipulated period. Accordingly, it may be possible that the authorities view issuance of commercial credit note and adjustment of value as a failure to discharge full payment in respect of the GST invoice leading to ineligibility to claim credit on this account.
The above view has also been upheld by the Advance Ruling Authority in the case of M/s MRF Limited [2019 (3) TMI 928]. In the said case, the applicant sought clarity on eligibility to claim credit pertaining to post- supply discount offered by the supplier. The Authority was of the view that the value of supply shall be the value indicated on the original GST invoice whereas the recipient has only made payment of the discounted value. Therefore, it was held that the applicant was not eligible to claim credit of GST pertaining to the discount value.
It may be useful to recollect from the past wherein specific clarifications and rulings under the service tax, excise and certain state VAT laws (for instance, Delhi, Andhra Pradesh) were provided in respect of post-supply discounts. In such cases, discounted payments were deemed as final payments and hence, no credit reversals were triggered.
However, a better view in this regard could be that post-supply discount should not be viewed as a failure on the part of the recipient to make full payment towards value of supply. Instead the discounted payment should be deemed as full payment between the parties and credit to the extent of tax actually paid by the recipient, should be available.
Considering the fact that the full amount of GST as applicable on the original transaction value remains paid to the government, there is no revenue loss to the exchequer. Accordingly, availability of input tax credit in the hands of the recipient should not get vitiated due to commercial post-supply discounts. This view is also in line with the treatment prescribed under the pre-GST regime. The situation re-emphasises the need for cognizance of settled tax positions under the erstwhile regime in respect of established business practices. Therefore, one does expect the government to issue suitable clarifications and provide relief on this aspect.
(Rajeev Dimri is Partner, Deloitte India and Siddharth Tandon is Director, Deloitte India.)