Post-Sale Discounts Under GST: Supplier Must Obtain Client Undertaking or CA Certificate, Says CBIC

In a significant development, the Central Board of Indirect Taxes and Customs (CBIC) has mandated that suppliers offering post-sale discounts through credit notes under the Goods and Services Tax (GST) regime will have to ensure that their clients provide an undertaking or a certificate from a Chartered Accountant (CA) or Cost Accountant (CMA) stating that the Input Tax Credit (ITC) availed on the discount value has been reversed.

This move comes as there is currently no mechanism to track whether the ITC on such discounts has been reversed or not. The CBIC aims to address this gap and bring more transparency and compliance in GST practices related to post-sale discounts.

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New Guidelines for Post-Sale Discounts Under GST.

As per the new guidelines issued by the CBIC:

• Suppliers giving post-sale discounts through credit notes will have to procure either an undertaking from the recipient or a certificate from a CA/CMA certifying that the recipient has made the required proportionate reversal of ITC in respect of the credit note.
• For discounts where the GST amount (CGST+SGST+IGST and cess) does not exceed Rs 5 lakh in a financial year, an undertaking from the recipient will suffice.
• For discounts above Rs 5 lakh, a CA/CMA certificate confirming the ITC reversal by the recipient will be necessary.
• These documents with a unique identification number will serve as proof during GST audits.
• This practice is applicable till the time a functionality is made available on the GST portal for suppliers and tax officers to verify the ITC reversal.

The circular is set to have a retrospective effect, impacting all demands on this issue since the rollout of GST in July 2017. Taxpayers engaged in litigation on this matter can leverage the clarification for relief.

Impact on Businesses and Industry.

The new guidelines are expected to significantly benefit the industry by bringing clarity on the process of issuing credit notes for post-sale discounts. However, it also increases the compliance burden on businesses.

Obtaining CA/CMA certificates for discounts above Rs 5 lakh and undertakings for smaller transactions will add to the documentation requirements. Accounting and billing systems may need to be updated to accommodate these changes.

While the circular demands meticulous compliance, it promises long-term benefits in terms of predictable and streamlined GST operations. It will help resolve disputes between businesses and tax authorities regarding the treatment of post-sale discounts.

Concept of Post-Sale Discounts Under GST.

Post-sale discounts refer to price reductions or rebates given by a supplier to a buyer after the supply of goods or services has been completed and invoiced. Such discounts are usually provided through credit notes to offer incentives, promote sales, or compensate for various factors.

Under GST laws, post-sale discounts are dealt with under Section 15(3) of the CGST Act, 2017. As per this section, for post-sale discounts to be excluded from the taxable value of supply:

1. The discount should be established in terms of an agreement entered into at or before the time of supply.
2. The discount should be specifically linked to relevant invoices.
3. Input tax credit attributable to the discount should be reversed by the recipient.

If these conditions are not met, the post-sale discount would not reduce the taxable value and GST would be applicable on the undiscounted price.

Types of Post-Sale Discounts.

Post-sale discounts can be of various types, each with different GST implications:

1. Discounts Without Any Obligation on the Recipient.

If a post-sale discount is given by the supplier to the recipient without any further obligation or action required at the recipient’s end, and the discount terms are established as per an agreement at or before the time of supply, then such discount will be related to the original supply and not included in the taxable value.

In such cases, the supplier can issue a credit note with GST amount and the recipient is required to reverse the corresponding input tax credit.

2. Discounts With an Obligation on the Recipient.

If the post-sale discount given by the supplier to the recipient involves an obligation on the recipient to undertake some activity like a special sales drive, advertisement campaign, exhibition, etc., then such discount is treated as a separate supply of service by the recipient to the supplier.

In this scenario, the recipient would be liable to pay GST on the value of the discount received, treating it as a consideration for the services rendered.

3. Target-Based Incentives and Schemes.

Many suppliers offer target-based incentives and discount schemes to their dealers or distributors to boost sales. The treatment of such schemes under GST depends on the specific nature and terms of the arrangement.

• If the incentive is a mere price reduction for achieving agreed targets without any separate obligation on the dealer, it may be treated as a post-sale discount eligible for exclusion from taxable value, subject to reversal of ITC by the dealer.
• However, if the incentive involves an obligation on the dealer to undertake a separate supply of service like promotional activities, then GST would apply on the value of such supply.

4. Secondary Discounts.

Secondary discounts are typically provided by a supplier to a dealer based on the downstream sales made by the dealer to the final customers. The GST implications of secondary discounts have been a matter of debate and litigation.

Clarifications issued by the CBIC suggest that if the secondary discount is a post-sale incentive requiring the dealer to carry out some additional activity or obligation, it would be treated as a separate supply of service by the dealer and attract GST.

On the other hand, if the secondary discount is given without any further obligation on the dealer and the discount terms are pre-agreed, it may be treated as a post-sale discount eligible for exclusion from the taxable value.

Challenges and Way Forward.

The treatment of post-sale discounts under GST has been a complex issue, leading to uncertainties and disputes. Businesses, especially in sectors like FMCG and consumer goods where discounts and incentive schemes are prevalent, have faced GST scrutiny and demands on this account.

While the recent CBIC circular aims to bring clarity and uniformity in the GST practices related to post-sale discounts, it also highlights the need for businesses to carefully analyze and structure their discount schemes and agreements to ensure GST compliance.

Proper documentation, timely issuance of credit notes, reversal of ITC by recipients, and maintenance of appropriate records will be crucial to avoid any GST risks or disputes.

The government should also focus on providing more comprehensive guidelines and implementing a robust mechanism on the GST portal for tracking and verifying ITC reversals related to post-sale discounts. This will ease the compliance burden on businesses and facilitate a transparent and efficient GST system.

Moreover, the GST Council should deliberate on simplifying the provisions related to post-sale discounts and bring more clarity on the treatment of various discount schemes prevalent in the industry. This will help in reducing litigation and fostering a business-friendly environment.

In Conclusion, the recent CBIC circular on post-sale discounts under GST is a step towards bringing more transparency and compliance in this area. However, it also underscores the need for businesses to be diligent in their GST practices and for the government to provide more clarity and simplification in the GST laws. A collaborative approach between the industry and the government is essential to address the challenges and realize the full potential of GST as a simple, efficient, and business-friendly tax regime.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency of the Indian government. The information provided is for general informational purposes only and is not intended to be legal advice. Readers are encouraged to consult with a qualified professional for advice concerning their specific circumstances. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information provided in this article.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.