Dr. Rajeev Ranjan,
5th Floor, Tower II, Jeevan Bharti Building,
Janpath Road, Connaught Place,
New Delhi-110 001.
August 29, 2019
Subject: Treatment of secondary or post-sales discounts under GST
This is to recall the meeting which an IBA delegation had with you on August 21, 2019 on the above subject. The delegation had represented in respect of Circular No. 105/24/2019-GST dated June 28, 2019 issued by the Central Board of Indirect Taxes and Customs, which has resulted in a situation of considerable operational difficulty and commercial inconvenience for the industry.
We are extremely grateful for the patient hearing accorded to the delegation. It will also be recalled that we had submitted a letter of even number dated August 6, 2019 to you in this regard along with a detailed note.
During the discussions, specific and pointed concerns of the industry were raised by the delegation. We are bringing out those aspects in this communication to amplify the submissions contained in the Note enclosed with the aforesaid letter of August 6, 2019.
The trade functions in a principal-to-principal capacity and its downstream dependent activity of reselling by the Intermediate Trade.
All discounts are included in the price and are passed on, out of the price only. Therefore, there is an element of double taxation.
Any Discounts passed on only go to reduce the price of goods purchased by the intermediate trade.
Regarding Paragraph 3 of the Circular dated June 28, 2019
The Circular has, in paragraph 3, demanded only extra compliance, which will not result in any increase in Revenue (either CGST or SGST).
There is no service rendered by the intermediate trade to the Principal as the activity is reselling of goods
Paragraph 3 talks of additional obligation being re –characterised as Service but the entire extra margin earned on selling more goods is taxed as goods.
Regarding Paragraph 4 of the Circular
The Circular has attempted, in paragraph 4, to redefine the concept of “any other person” which has not been defined in the CGST Act.
Re-characterization of only Discount transactions undertaken through Financial credit notes appears to overlook the substance of the transaction.
To characterize any activity as Service, there have to be 2 ingredients, i.e. performance of activity and consideration for such activity. As per agreement, the Distributor is given discount to further pass it on to the retailer, hence he does not retain any discount.
As consideration is completely missing in price support, hence even if it is a service, the same is without any consideration and not liable for GST.
Transactions deemed to fall under paragraph 4 can also fall under paragraph 3 of the Circular.
.Current Trade Reactions
The Intermediate Trade is forming groups to ask for clarity on the issue and stopping progress of trade in the interim. In this context, attached is a letter dated August 26, 2019 sent by the Federation of All India Distributors Association to the GST authorities and copied to several sectors; this clearly demonstrates the impact of the Circular on free flow of trade.
Overall, the Federation is requesting that there be protection for previous period demands as the Circular could be used to open up prior period demands.
Trade guarantees for possible fallout of litigation.
Considering that the annual returns are being finalized, any litigation arising out of the Circular can de-rail growth of the non-alcoholic Beverage Industry in Q3 and Q4, thereby leading to lower GST collections.
Attention is invited to the enclosures ‘Scenario 1’ and ‘Scenario 2’. The examples in the two attached sheets are being explained below.
In Scenario 1 we have mapped a transaction which falls under paragraph 3. In this situation, an extra discount is offered to achieve a higher target .This is in the nature of a Market Execution Promotion Incentive and the end result, after adoption of Circular 105, does not lead to enhanced Revenue. On the other hand, if we give a Discount up-front and if the downstream retailer is a composite dealer, there is a possibility of lower collections. This variation has been explained in the third computation.
In this scenario, the distress sale discount is explained to fit the concept of price support as adumbrated in paragraph 4 of the Circular and also highlighted that the tax cost of the intermediate trade has gone up from the tariff rate which is fixed at 18%. Additionally, the same transaction can be characterized in 3 ways: (a) Discount if given with invoice reference, (b) Service fee as per Paragraph 3 of the Circular, or (c) Subsidy as per Paragraph 4 of the Circular, if given without invoice reference.
It is requested that a suitable addendum/amendment/clarification to Circular 105 dated June 28, 2019 be kindly issued which addresses the issues raised above, so that the adverse reaction of the Intermediate Trade and the Retail Trade is mitigated and double taxation avoided.