Readers may accuse me of hyperbole, but from my vantage point, it appears that never has removal of certain ambiguities/errors in tax laws been so critical for the Indian economy — I refer here to the erroneous clarifications with respect to GST
on post-sale discounts (Circular No. 105/24/2019-GST, dated June 28, 2019).
We all know that India’s GDP fell to a 6-year low of 5 per cent in the first quarter of FY20. Based on media reports, there is a broad consensus among various consumer-facing industry sectors that the October-December festive quarter will be crucial for a revival in demand, which could halt the slowdown of the past three quarters — to that end, massive marketing/promotional expenditures are being planned by companies in the FMCG, the consumer electronics and the automobile sectors, which are expected to revive consumer sentiment.
However, such promotional schemes may fall flat unless the government immediately issues further clarifications to allay concerns of dealers/distributors arising due to apparent errors in the circular.
Already, various trade bodies of dealers/distributors across sectors have expressed their unwillingness to participate in any trade incentive scheme unless they get complete clarity vis a vis the circular.
Let us quickly understand what the circular clarifies through simple illustrations:
1. Para 3 of the circular: Say, A has a dealer/distributor contract with B whereunder A sells a packet of biscuit to B for Rs 10 and B agrees to further sell the same biscuit packet to customers. Further, as per the dealer/distributor contract, B also undertakes certain activities periodically to increase B’s sales, like special sales drive, advertisement campaign, etc. A extends a post-sale discount of Rs 5 if B buys 100 packets of biscuits from A for resale.
As per Para 3: There are two different transactions between A and B — one, of sale of goods from the manufacturer (A) to the dealer (B); and second, supply of service by the dealer (B) to the manufacturer (A) for which the post-sale discount of Rs 5 is ‘consideration’.
Para 3 is effectively inventing a new taxable service transgressing the bounds of GST
statutes and that too, vaguely, making it impossible to implement and prone to abuse.
2. Para 4 of the circular: Say, in the above illustration, in order to increase the volume of sale for a particular type of biscuits, B agrees with A to reduce B’s resale price to customer to Rs 10 — the remainder Rs 5 will be paid by A to B as a post-sale discount.
As per para 4: Additional discount would represent additional consideration flowing from A to B, which would be added to the consideration payable by the customer for arriving at value of supply in the hands of the dealer (B) for levy of GST
at Rs 15 (ie, Rs 10 + Rs 5) per packet as opposed to GST on Rs 10.
Even if any dealer/distributor decides to accept para 3, such dealer/distributor will have to treat himself as a service provider, not from July 2019, but from July 2017 under GST and possibly even under service tax regime, this would also retrospectively impact his income tax position (and manufacturer (A)’s TDS compliance on such alleged ‘service’).
Discounts are a well-understood concept commercially, as well as under tax laws. Indirect tax laws, including GST statutes, typically prescribe only two consequences for discounts -- they will either be deductible from the taxable turnover of the person extending the discount or not be deductible. The circular is trying to artificially construe the same discount simultaneously as consideration for service by the dealer (B) to the manufacturer (A) and/or additional consideration flowing from the manufacturer (A) to dealer (B), and is grossly erroneous to that extent.
The circular also fails to recognise that the costs of such incentives/discounts are anyway considered in the value of the product on which GST is already paid by the manufacturer (A). Had this been a pre-sale discount, it would have been excluded from GST. Just because the same is passed on a post-facto basis, it cannot change the nature of the transaction itself.
There are several other legal arguments, too, against the clarifications under this circular. This circular surely cannot be the last word in regard to the treatment of post-sale discounts and incentives under GST.
Many representations have been filed by various industry bodies in this regard and a corrective circular is eagerly awaited by the entire consumer-facing sector (including FMCG, consumer electronics, and automobiles), given the avowed seriousness of the government in its bid to tackle the current economic slowdown.
Without corrective steps, this circular will be vulnerable to get struck down as arbitrary and manifestly erroneous by appropriate courts. However, efforts to revive the Indian economy might be adversely affected by that time.
The author is partner (tax controversy management & contract documentation), Advaita Legal