Clarifications on treatment of sales promotion schemes and secondary or post-sales discounts under GST.
Section 15 of the Central Goods and Services Act, 2017 (“the Act”) provided that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. The sub-section (3) further clarified that the value of supply shall not include any discount which is given –
- before or at the time of supply if such discount had been duly recorded in the invoice issued in respect of such supply; and
- after the supply has been effected, if –
- such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
- input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
Recently, Central Board of Indirect Taxes and Customs ‘CBIC”) issued clarification on the treatment of sales promotions schemes under the GST vide Circular No. 92/11/2019-GST. The circular is intended to cover the several promotional schemes which are offered by taxable persons to increase sales volume and to attract new customers for their product, with regard to taxability, valuation, availability or otherwise of Input Tax Credit (“ITC”) in the hands of the supplier. The clarification is summarized as follows:
| Scheme | Clarification on Taxability | Clarification on availability of ITC |
| Free Samples and Gifts | Samples that are supplied free of cost, without any consideration, do not qualify as “supply” under GST, except where the activity falls within the ambit of Schedule I of the Act. | ITC is not available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.
However, where the activity of distribution of gifts or free samples falls within the scope of „supply‟ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC. |
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| Scheme | Clarification on Taxability | Clarification on availability of ITC |
| Buy one get one free offer | In case of buy one and get one offers, while it may seem that one items is being supplied free of cost, it is, in fact not an individual supply of free goods, but a case of two or more individual supplies where a single price is being charged for the entire supply. It can be best treated as supplying two goods for the price of one.
Taxability of such supply will be dependent upon as to whether the supply is a composite supply, or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the Act. |
ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers. |
| Discounts including “Buy more, save more” offers – | Suppliers often offer staggered discounts (increase in discount rate with increase in purchase volume). Such discounts are shown on the invoice itself. Suppliers also sometimes offer, periodic/ year end discounts based on annual sale volumes. Such invoices though are not shown on the invoices, they are established in terms of an agreement entered into at or before the time of supply. Such discounts are passed on by the suppliers through credit notes.
Discounts offered by suppliers to customers, including staggered discounts or the post-sale volume discounts established before or at the time of supply shall be excluded to determine the value of supply provided they satisfy the parameters laid down in section 15 (3), including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier. |
The supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts |
| Scheme | Clarification on Taxability | Clarification on availability of ITC |
| Secondary discounts | These discounts are not known at the time of supply and are offered after the supply is already over.
It has been clarified that the financial/commercial credit note(s) can be issued by the supplier even if the conditions Section 15 (3), i.e. the discounts being established before the sale and being recorded on the invoice, are not satisfied. It has been further clarified that the value of supply shall not exclude any such secondary discounts. In other words, the value of supply shall not exclude discounts issued by way of credit notes. |
There is no impact on availability or otherwise of ITC in the hands of supplier in this case. |
The above stated circular resulted in further queries being raised regarding the tax treatment in cases of the secondary discounts or post sale discounts. CBIC further issued Circular No. 105/24/2019-GST dated 28 June 2019 to provide clarification on these matters. The circular is further discussed as under:
For the purpose of value of supply, post sales discounts are governed by the provisions of 15 (3)(b) of the Act. It is crucial to examine the true nature of discount given by the supplier of goods to the dealer.
| Type of secondary sale | Clarification on Taxability |
| Post-sale discount by the supplier the dealer without any further obligation or action required at the dealer’s end | The post sales discount will be related to the original supply of goods and it would not be included in the value of supply, in the hands of supplier of goods, subject to the fulfillment of provisions Section 15 (3) of the Act. |
| Additional discount given by supplier to the dealer, requiring the dealer to do some act like undertaking special sales
drive, advertisement campaign, exhibition etc. |
This will be treated as separate transaction and the additional discount will be the consideration for undertaking such activity. The dealer, being supplier of services, would be required to charge applicable GST on the value of such additional discount and the supplier of goods, being recipient of services, will be eligible to claim input tax credit. |
www.wsco.in Office No 309, Third Floor, Chokhani Square – Sector 18, Noida, Uttar Pradesh – 201301 Tel.: 0120-4975561
| Type of secondary sale | Clarification on Taxability |
| Additional discount is given by the supplier of goods to the dealer to offer a special reduced price by the dealer to the customer to augment the sales volume | The additional discount would represent the consideration flowing from the Supplier of goods to the dealer for the supply made by dealer to the customer. This additional Discount is required to be added for the purpose of arriving Value of supply, in the hands of the dealer.
The customer, if registered, would be eligible to claim ITC of the tax charged by the dealer only to the extent of the tax paid by the said customer to the dealer in view of second proviso to section 16 (2) of the Act. |
| Eligible ITC for the dealer on original invoice, if the discounts granted by the supplier of goods are not permitted to be excluded from the value of supply and the supplier issues financial / commercial credit notes | The dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods, as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial / commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier. |
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