This Tax Alert summarizes the recent Circular[1] issued by the Central Board of Indirect Taxes and Customs clarifying tax treatment of secondary and post-sale discounts under GST.
The key clarifications are:
- Where the recipient makes
discounted payment to supplier on account of financial or commercial
credit note (i.e., where the supplier does not reduce original tax
liability), the recipient is not required to reverse input tax credit
(ITC). As the original transaction value and corresponding tax paid remain
unchanged, full ITC eligibility is retained.
- Post-sale discounts
extended by manufacturers to dealers/distributors to pass it on to the
end-customer, without any pre-existing arrangement with the end customer,
are considered as price reductions only. Such discounts cannot be included
in consideration as the monetary value of the inducement of further supply
of goods by the dealers.
- Where a manufacturer
agrees with an end customer to supply goods at a discounted price, the
manufacturer may issue commercial or financial credit note to the dealer,
enabling it to provide the goods at the agreed discounted rate to the end
consumer. This discount constitutes an inducement towards dealers’ supply
to the customer and must be included in the value of supply.
- When dealers receive
post-sale discounts, they may engage in promotional activities to boost
their own sales, thereby increasing their revenue. Such discounts shall
not be treated as consideration for any separate supply of service by the
dealer to the manufacturer.
- However, where dealers
explicitly undertake specific promotional services (e.g., advertising,
co-branding, customization, special campaigns) under a contractual
agreement, and consideration for such services is distinctly specified,
GST will be applicable on such services.
Comments:
- The circular is expected
to resolve several long-standing disputes between taxpayers and the
department.
- Clarification seems to be
in conformity with the industry position that ITC reversal is not required
when commercial or financial credit note is issued.
- Manufacturers and brand
owners, notably in the automobile and electronics industry, often enter
into an arrangement with corporates for offering goods at discounted
prices to its employees. The implication of this Circular for such
arrangements may need to be carefully assessed.
[1] Circular No. 251/08/2025-GST dated 12 September 2025
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