Clarification on Tax Treatment of Secondary or Post-Sale Discounts

Clarification on Tax Treatment of Secondary or Post-Sale Discounts under GST

The circular issued under the Central Goods and Services Tax (CGST) Act, 2017, by the Board, aiming to clarify the tax treatment of secondary or post-sale discounts under GST. It addresses three key issues related to how such discounts affect input tax credit (ITC), consideration for supply, and promotional activities. Below is a detailed yet concise explanation of each issue and its clarification:

1. Input Tax Credit (ITC) on Discounted Payments via Financial/Commercial Credit Notes

Issue: Can a recipient claim full ITC when they pay a discounted amount to the supplier due to financial or commercial credit notes issued by the supplier?

Clarification:

• Legal Basis: Section 16(1) of the CGST Act allows a registered person to claim ITC on the tax charged for goods or services used in their business.
• Circular Reference: Circular No. 92/11/2019-GST (dated March 7, 2019) states that when a supplier issues financial or commercial credit notes, they cannot reduce their original tax liability. This means the transaction value (and the tax charged) remains unchanged despite the discount.
• Impact on ITC: Since the transaction value and corresponding tax liability are not reduced, the recipient does not need to reverse any ITC. They can claim the full ITC based on the original tax invoice, as the discount does not affect the tax charged.

Example:

• A supplier sells goods worth ₹1,00,000 + ₹18,000 GST to a recipient. Later, the supplier issues a ₹10,000 financial credit note as a discount.
• The supplier cannot reduce their GST liability (still ₹18,000), and the recipient can claim the full ITC of ₹18,000, as the tax amount remains unchanged.

Key Takeaway: Recipients can claim full ITC despite receiving discounts via financial/commercial credit notes, as the original transaction value and tax liability remain unaffected.

2. Post-Sale Discounts as Consideration for Supply

Issue: Is a post-sale discount offered by a manufacturer to a dealer/distributor considered as part of the “consideration” for the dealer’s supply of goods to the end customer?

Clarification:

• Definition of Consideration: Section 2(31) of the CGST Act defines “consideration” to include the monetary value of any act that induces a supply of goods or services.
• Two Scenarios:

1. No Agreement with End Customer:
   • There are two independent transactions: (a) manufacturer to dealer, and (b) dealer to end customer.
   • Once goods are sold to the dealer, the dealer owns them (principal-to-principal basis). Discounts given by the manufacturer to the dealer are for competitive pricing to boost sales, not as an inducement for a specific supply.
   • Conclusion: Such discounts are not considered part of the consideration for the dealer’s supply to the end customer, as they only reduce the sale price of the goods.
2. Agreement with End Customer:
   • If the manufacturer has an agreement with the end customer to supply goods at a discounted rate, the manufacturer may issue a credit note to the dealer to enable the dealer to sell at the agreed discounted price.
   • Conclusion: In this case, the discount is considered part of the consideration, as it induces the dealer to supply goods to the end customer at the agreed rate.

Example:

• Case 1 (No Agreement): A manufacturer sells goods to a dealer for ₹1,00,000 and later offers a ₹10,000 discount to help the dealer sell competitively. This discount is not consideration, as it’s unrelated to any specific inducement for the dealer’s supply to the end customer.
• Case 2 (With Agreement): The manufacturer agrees with an end customer to supply goods at ₹90,000 (instead of ₹1,00,000). The manufacturer gives a ₹10,000 credit note to the dealer to facilitate this. The discount is part of the consideration for the dealer’s supply to the end customer.

Key Takeaway: Post-sale discounts are not consideration unless they are linked to an agreement with the end customer, in which case they are treated as an inducement for the dealer’s supply.

3. Post-Sale Discounts as Consideration for Promotional Activities

Issue: Can post-sale discounts from a manufacturer to a dealer be treated as consideration for promotional activities performed by the dealer to boost sales?

Clarification:

• General Case:
• Dealers may undertake promotional activities (e.g., advertising, sales drives) after receiving post-sale discounts, but these activities primarily benefit the dealer by increasing their own sales and revenue.
• The discount reduces the sale price of the goods and is not linked to any independent service provided to the manufacturer.
• Conclusion: Such discounts are not treated as consideration for a separate supply of promotional services.
• Specific Case:
• If there is an explicit agreement where the dealer provides specific promotional services (e.g., advertising campaigns, co-branding, customer support) for a clearly defined consideration, GST is applicable on the value of those services.
• Conclusion: GST is levied only when the dealer provides distinct promotional services under a clear agreement with the manufacturer.

Example:

• General Case: A manufacturer gives a ₹10,000 discount to a dealer, who then runs a promotional campaign to sell the goods. Since the discount is not tied to a specific service agreement, it’s not considered consideration for promotional services.
• Specific Case: The manufacturer and dealer have an agreement where the dealer will conduct an advertising campaign for ₹10,000, covered by a credit note. This ₹10,000 is treated as consideration for a taxable supply of services, and GST is applicable.

Key Takeaway: Post-sale discounts are not consideration for promotional activities unless there’s an explicit agreement for specific services with defined consideration, in which case GST applies.

Summary of Key Points

1. ITC Eligibility: Recipients can claim full ITC despite discounts via financial/commercial credit notes, as the original tax liability remains unchanged.
2. Discounts as Consideration: Post-sale discounts are not consideration for the dealer’s supply to the end customer unless tied to an agreement with the end customer.
3. Promotional Activities: Discounts are not consideration for promotional services unless there’s a specific agreement for distinct services, in which case GST applies.

Additional Notes

• The circular emphasizes uniformity in GST implementation and requests trade notices to publicize these clarifications.
• Any implementation difficulties should be reported to the Board.
• This clarification aligns with the GST framework’s focus on the transaction value and the nature of agreements between parties.

Circular No. 251/08/2025-GST

Also Read: Recommendations of the 56th Meeting of the GST Council – CA Cult

CA Cult YouTube: Calculation of Income Tax FY 2024-25 | Old vs New Regime | For Salaried Employees

Read More on GST, CBIC