New Delhi: Tax on discounts that manufacturers and wholesalers extend to retailers for passing on to consumers is becoming an area of confusion and possible litigation, say experts. The government’s recent decision to tax such discounts has put retailers in a difficult situation, they say.
The Central Board of Indirect Taxes and Customs (CBIC) had in June clarified that discounts that dealers get from manufacturers and wholesalers help in boosting sales and therefore amount to a taxable consideration flowing from the supplier to the retailer. Such discounts are to be added to the transaction value between retailer and consumer for payment of Goods and Services Tax (GST). Industry watchers say this is leading to confusion at the time of sales and disputes between retailer and consumer as the former is unable to pass this additional burden to the latter who is often willing to pay tax only on the sale price after discount. It is hard for dealers to explain to consumers they have to pay GST on the amount of discount they receive, they said.
The 28 June circular from CBIC was an effort to clarify the applicability of taxes on what is called secondary or post-sale discounts. It suggested that wherever suppliers give discounts to retailers without any obligation by the latter to render services like advertisement campaign or special sales drive, such discounts are not to be subject to GST. However, if discounts from the manufacturer or supplier are linked to such obligations by the retailer, it should be taxed. The tax authority sought to distinguish discounts in such cases as a separate transaction between the manufacturer and the retailer from the sale of goods made by the retailer to the end consumer.
"The clarification on discounts with an obligation of passing it to the recipient, forming a part of the value on which GST is leviable (even while the said is not commercially payable by the recipient) opens a Pandora's box for most industry players; essentially because companies had always viewed these discounts as price reductions and not included them for payment of GST," said Abhishek Jain, tax partner, EY.
Tax on discounts has been an area of dispute in the pre-GST era too. The Supreme Court had in 2012 ruled in a dispute between central excise commissioner, Mumbai, and Fiat India (P) Ltd. that the wholesale price declared by the company, which was lower than the cost of production, cannot be treated as a normal price for levy of excise duty as it would result in short payment of tax. The reasoning was that discounts given to consumers for gaining market penetration was also a taxable 'consideration'.