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Incentives Earned By Dealers Shall Now Be Taxed Under GST

GST

Source: Bloombergquint

The government in clarification has declared that Advertisements or special promotion drives undertaken by the dealer of a company will be now considered as a service, and would be taxed.

As per this clarification, Companies that offer additional discounts to their dealers as incentives and ask them to conduct advertising campaigns to promote their brand/products. These incentives given to dealers shall now be taxed. Dealers will charge GST on the service they provide to companies, for which companies will be eligible to claim ITC.

Taxability of incentives or discounts offered to dealers for undertaking promotional activities would compel organizations to relook their tax liabilities.

The Central Board of Indirect Taxes and Customs has also clarified that if companies offer discounts to dealers for increasing of sales, to be passed on to customers, GST will be payable on the amount including the discount value. For example, if a supplier offers a discount of ₹ 500 to a dealer which was not known at the time of sale, and mandates the dealer to pass it on to the consumer, the dealer will be liable to pay tax on the value of goods including the discount of ₹ 500.

The clarification also said that if a company issues a credit note to a dealer, the latter would be able to claim full ITC on the total tax paid on supply, including the amount for which a credit note has been issued. For example, if a dealer purchases goods worth ₹ 10,000 from a supplier and pays 18% GST (₹ 1,800), and later gets a discount of ₹ 1000 from the supplier in the form of a credit note, he/she will be able to claim ITC on ₹ 1,800. Previously, the industry had doubts if businesses would be eligible to claim any credit on the amount for which a credit note has been issued.

11 Comments

  1. Chetan says:

    I want to know about HSN Code Of incentive income

  2. NAGA KRISHNA SHASTHRI says:

    we have received 318244 plus gst 18% 57283.92 TOTAL 375527.92 AS TARGET INCENTIVE, PLEASE CLARIFY WHETHER GST INPUT CAN be TAKEN OR NOT

    • Arpita@HostBooks says:

      Post sale discount/Incentive provided on fulfilment of certain obligation
      Where a discount/incentive is provided to a dealer / recipient only on complying with certain obligations like advertisement, exhibitions, sales drive, etc., such discounts provided shall be treated as separate transaction.

      As per clarification provided by CBIC vide Circular No. 105/24/2019-GST dated 28th June, 2019, such transaction shall be treated as separate transaction between supplier and recipient and the recipient shall issue a tax invoice for such transaction that shall be compensated by the supplier (Goods Seller). Supplier(Goods seller) can also avail input tax credit on the same.
      But in the given case you provided services to the supplier of goods, this makes you liable to pay tax to Govt. from ITC ledger or cash Ledger to the Govt.
      GST Tax Amount is Rs. 57283.92

  3. Meraju Din Ganai says:

    I as wholesale dealer of cement made purchases worth 4 crore in a financial year and sold the same for say 4.10 crores. At end of the the Financial Year the manufacturer credited an amount of 2.40 lac as incentive ( or price adjustment). The manufacturer has not shown this in his gst returns and meither has issued any ctedit not. What shall be the treatment for the same as per GST provision in my books / gst return. Will humbled if you enlight me about matter.

    • Arpita@HostBooks says:

      . The Treatment of Incentive given by supplier to buyer (wholesale dealer) as per Section 15 of CGST Act, 2017. Situation given below to handle it
      GST on Discounts/Incentive: Legal Provisions, Pre/Post Sale Discount (Examples)

      Under GST Law, valuation of taxable supply is important aspect. While valuation of supply various points need to be considered and one such area is discounts/Incentive scheme and its treatment.
      With regard to this, a clarification was issued by CBIC through Circular number 105/24/2019 where post sale discount/Incentive Scheme treatment has been discussed. And understand the treatment of discounts/Incentive under GST Law in detail.
      • Legal Provisions for GST on Discounts/Incentive
      Discounts/Incentive are generally given by supplier to increase sales or encourage the buyer to pay promptly. Treatment of discounts is defined in Section 15(3) of CGST Act, 2017. The section states that –
      The value of supply shall not include any discount which is given–
      1. Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
      2. After the supply has been effected, if-

      (i) 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

      (ii) 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.

      From above, we can classify discount/Incentive based on time of discounts–
      (1) Discounts/Incentive given before or at the time of sale
      (2) Post sale Discounts/Incentive.

      The treatment of GST depends on the type of discount/Incentive scheme which we will now see in detail.

      1. Discounts/Incentive given before or at the time of supply of goods and/or services

      Discounts that are given before or at the time of sale can be deducted from transaction value at the time of sale; no GST will be levied on the same. However, such discounts shall be mentioned on the tax invoice.

      2. Post sale Discounts/Incentive scheme

      Post sale discounts are those which are given by the supplier after the sale has been effected.
      a. Discount/Incentive agreed at the time of supply
      b. Discount/Incentive not agreed at the time of supply
      c. Discount/Incentive with an additional burden to do some act. Of
      (a) Discount/Incentive agreed at the time of supply –
      A supplier has to issue a GST credit note where the recipient or buyer has fulfilled the terms of agreement.

      The recipient has to reduce the amount of GST as mentioned in credit note from the input tax credit already availed against that supply. Thus, we can understand that one has fulfil the following conditions –

      • Discount terms are agreed at the time of supply
      • Input tax credit on the discount has been reversed by the recipient of supply
      • Such discount can be linked to that particular supply or invoice
      • Credit note is issued within six months from the end of the financial year
      (b) Discount/Incentive not agreed at the time of supply –
      Sometimes, discounts are provided even if the same are not agreed with the supplier at the time of supply. Such discounts are generally given for bulk quantity, early payment, price reduction, etc.

      In such cases, where discount was not agreed at the time of sale, credit note with GTS cannot be issued as it does not satisfy the conditions of section 15(3).

      However, as per clarification provided by CBIC vide Circular No. 92/11/2019-GST dated 7th March, 2019, a supplier can issue a financial credit note for such discounts. Such credit notes will not have GST.

      Further, CBIC has also clarified vide Circular No. 105/24/2019-GST dated 28th June, 2019 that the recipient shall not reverse the input tax credit already availed if he pays the supplier the entire value of tax charged on the original invoice along with the taxable value of supplies less value of financial credit note

      (c) Post sale discount/Incentive provided on fulfilment of certain obligation –
      Where a discount/Incentive is provided to a dealer / recipient only on complying with certain obligations like advertisement, exhibitions, sales drive, etc., such discounts provided shall be treated as separate transaction.

      As per clarification provided by CBIC vide Circular No. 105/24/2019-GST dated 28th June, 2019, such transaction shall be treated as separate transaction between supplier and recipient and the recipient shall issue a tax invoice for such transaction that shall be compensated by the supplier (Goods Seller). Supplier (Goods Seller) can also avail input tax credit on the same.

      Final treatment in your situation: Treatment of discount/Incentive received in the books of supplier and the recipient will depend on the conditions under which such discount has been provided. One of the important points to be considered is whether the discount was agreed at the time of sale or not.
      In the given situation, you received an amount Rs. 2.4 lakhs from supplier and supplier didn’t issue credit note. It is treated as separate supply of services given by you to the seller of cement and you raise tax invoice amount Rs. 2.4 included 18% GST amount.
      Show in your output supply in GSTR-1: taxable amount is Rs.20, 3390 and GST amount is Rs. 36,610 (18% GST tax Amount).

  4. Asset Finance says:

    Thank you very much for presenting this data about incentives earned by dealers shall now be taxed under GST, it’s known how to get approved but what are the next steps after getting the approval… Wonderful information, thanks a lot for sharing kind of content with us… great post!.

  5. Manoj Kumar says:

    I am a commercial vehicle dealer. My client has purchase vehicle from other dealer on behalf of me. Then other dealer give me commission on that case. So We want to raise commission invoice to that dealer. Please confirm sac code.

    • Arpita Bora says:

      SAC 996111 – Services provided for a fee or commission or on contract basis on wholesale trade – 18%
      SAC 996211 – Services provided for a fee or commission or on contract basis on retail trade – 18%

  6. Mangesh Thorat says:

    We have received Credit Notes worth Rs.41 Lakh without GST as a Target Discount/RC Incentives etc. and supplier has expense out the same value as a incentive/ Target Discount paid, is there any GST liability to pay. Request you to guide us for the same.

    • Sunil Dutt says:

      No, there is no GST liability on the discount received.

      As per second proviso to section 16(2) Where a recipient fails to pay to the supplier of goods or/and services (other than the supplies on which tax is payable on reverse charge basis), the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon.

      In above case recipient has received credit note worth Rs.41 Lakh as discount and not paid the amount of Rs.41 Lakhs which were otherwise required to be paid. But as per the Advance Ruling AAR – West Bengal e (2019) in re Senco Gold Ltd. It is held that, the recipient of goods and service can pay consideration through book adjustment and credit of input tax credit cannot be denied on this ground alone.

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