GST UPDATE ON DISCOUNT GIVEN BY COMPANIES TO DISTRIBUTORS

In this update we will discuss about recent Kerala AAAR ruling in case of Santosh Industries on the matters whether GST will be applicable on discount which is given by company to their dealers/customers through their distributors and whether the distributors are required to reverse the ITC on the amount of reimbursement received from the company in form of credit note issued to them.
Here the applicant M/s Castrol India was billing to their distributors as per their pricing policies and later on while the distributor was further billing to customers, company was giving discount to the customers. The billing was made directly at discounted price to the customers through customized software of the principal company without intervention of distributors and the company was issuing the commercial credit note to the distributors to reimburse the amount of discount provided to the customers.
The transaction value of supply is governed by the provisions of section 15 of the CGST Act. The deduction of the discount mentioned in case is governed by provisions of sub sec (3) of sec 15 of CGST Act which says that value of supply will not include discount amount in case discount is given before or at the time of supply. But here the company was providing the discount to ultimate consumer by issuing the commercial credit note to the distributor which is not satisfying the conditions of Sec 15 (3) of CGST Act. Therefore, in case of billing by distributor to consumer, the distributor will have to pay tax on the entire taxable value including the discount amount given by company to the consumer as held in the ruling by AAAR.
Furthermore, distributor will be eligible for claiming entire amount of ITC on original billing received from company to the distributor and the distributor need not reverse any amount of ITC on the account of commercial credit note issued by company to distributor to reimburse the discount amount as the commercial credit note do not have any effect on GST liability.
The CBIC has also clarified that if companies offer discounts to dealers for increasing the sales, which is ultimately to be passed on to the customers and such discount was not known at the time of sale to the distributors, then GST will be payable on the amount including the discount value and also entire amount of ITC will be available to the distributor. This will affect the amount to be paid by ultimate consumer.
On the other hand this kind of ruling is harsh on assesse as he will create the bill to the customer on discounted amount and will recover GST in bill on an amount including Discount amount. Moreover, some authors have argued that Section 2(31) of CGST Act says that consideration to a transaction include amount which is paid by any other person i.e. person other than supplier and recipient of goods involved in transaction chain. Hence discount provided by principal supplier cannot be a part of consideration for GST calculation because it is provided by the supplier himself. Schedule I gives specific cases where GST is payable even though there is no consideration. But issue in this update does not fall under situations discussed in Schedule I. Hence, GST is not payable on the same.

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GST UPDATE ON DISCOUNT GIVEN BY COMPANIES TO DISTRIBUTORS

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