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Incentives as Discounts

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..... Incentives as Discounts - By: - CA Akash Phophalia - Goods and Services Tax - GST - Dated:- 14-12-2017 - - Section 15 states about the valuation principles under GST. Section 15(3) reads as under Section 15(3) The value of the supply shall not include any discount which is given 
 (a) 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 (b) 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 issu .....

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..... ed by the supplier has been reversed by the recipient of the supply. The simple understanding form the above provision is that the discount is admissible as deduction from the sale value only when the conditions mentioned in the said section is fulfilled. To put it differently, discount is admissible as deduction only when it is recorded in the invoices or linked with the invoices coupled with the fact that the input credit is duly reversed. Now let us understand the implication of GST on different kinds of prevailing discounts in the industry in the following paragraphs. Here we need to look the transaction from two perspective. Firstly, whether the GST is reversible on the discounts or incentives received. Secondly, whether the in .....

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..... centive or discount in itself is an independent consideration for and independent supply. Trade discount is a discount that is deduction from the catalogue price of goods and is generally allowed to wholesalers and retailers engaged in the trade. Thus it is the net reduction in the sale price. Now under GST law whether such trade discount is allowable as deduction from sale price for payment of GST on the reduced sale price. As the nature of trade discount is such that it is the reduction from the catalogue price and is generally given upfront as reduction from the sale price in the invoice itself. Therefore, the said trade discount is admissible as deduction from the sale price and no GST is required to be paid on such trade discount .....

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..... . In the case of Orient General Industries Ltd v/s Collector of Central Excise, New Delhi 1984 (12) TMI 303 - CEGAT NEW DELHI , it was held in para 13 that the Lordships of Supreme Court have permitted the deduction of discount allowed in the trade by whatever name such discount is described having regard to the nature of goods provided the same is established either under an agreement or in terms of sale of by established practice. The said decision will hold true in GST regime also, however, with an additional condition that the said trade discount is either in the invoice itself or is specifically linked to the invoice. Another kind of practice prevailing in the industry is to provide discounts in the form of incentives by way .....

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..... of reduction in the price of the product. Such discounts are generally given post procurement of goods or even after sale of goods. As the terms of such discounts itself says that these are directly linked to the invoices therefore such discounts are eligible for deduction from sale price and GST can be reversed on the value of such discounts provided that the input tax credit claimed is also reversed. Turnover discounts are generally given by various names. It can be turnover discount, special incentive, bonus incentive, performance discount etc. It is given on attainment of the target by the retailer or the wholesaler. This type of benefit is given on the value of turnover achieved. It is clear on one part that since these kinds of di .....

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..... scounts are not linked with the invoices and therefore it will not result in reversal of GST. However, the other side of the transaction calls for review whether such discounts are taxable in the hands of the receives as the supply of service. In order to understand the taxability the author gives reference of the various judicial decisions cited in the judiciary. In Grey Worldwide (1) Pvt . Ltd v/s Commissioner of Service Tax, Mumbai 2014 (9) TMI 180 - CESTAT MUMBAI it was held that - It is seen and as correctly pointed out by the learned counsel that the coordinate bench of the Tribunal in the three cases as cited herein above, have held that the discounts/incentives received by the assesses from the print media will .....

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..... not be liable for service tax under the category of advertising agency services. If that be so, the said discount/incentive itself cannot be considered for the purpose of taxability under the head business auxiliary service as the amounts which are received are received are in respect of the services provide under the head category of advertising agency services and the amount are discounts and incentives and not as charges for service . Again in the case of tradex polymers Pvt.Ltd. these views were reiterated. Therefore, it can be seen that the tribunal has been consistently taking the stand that incentives received by an advertising agencyfrom the media without any contractual obligation to render any service cannot be levied to ser .....

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..... vice tax under the category of BAS.......................... . Therefore, the confirmation of service tax demand on these amounts, i.e. volume discounts, rate different and amounts written back cannot be sustained in law and accordingly, we set aside the same. In Tradex Polymers Pvt. Ltd. Commissioner of S.T., Ahmedabad 2011 (12) TMI 398 - CESTAT, AHMEDABAD it was held as - Stay/Dispensation of pre- deposit business Auxiliary service- Early payment incentive received by the distribution of goods of the principal and retained by them HELD : No service is involved as such retention of incentive is nothing but a discount received by the assessee section 35F of central excise act, 1944 as applicable to service tax .....

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..... vide section 83 of finance act, 1994. [2011(24)S.T.R. 447(Tribunal) relied on]. [Paras 3, 4] In Satnam Auto v/s CCE, Meerut I, 2017 (3) TMI 117 - CESTAT NEW DELHI - Business Auxiliary services Target incentive Depot Expenses paid by manufacture in pursuance of declared policy for achieving target in sales to authorised dealer cannot be subjected to service tax under category of business auxiliary services or business promotion services provided to manufacturer sections 65 , 66 and 73 of finance act, 1994 . [2016 (43) S.T.R. 158 (Tribunal) relied on]. [para - 6] In Toyota Lakozy Auto Pvt Ltd v/s CST Ex Mumbai I-II V 2016 (12) TMI 541 - CESTAT MUMBAI - Business Auxiliary service commi .....

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..... ssion / incentive received under dealership agreement agreement with manufacture for supply of vehicles on principal to- principal basis on which title and risk, passed on to assessee when vehicles are excise cleared and placed on common carrier assessee when vehicles are excise quantity invoices raise by manufacture after according discounts designated as commission / incentive merely as management terminology Held : in view of settled position in tribunal s decisions, discounts received on procurement of vehicles from manufacture not liable to tax as business auxiliary services demand set aside section 73 of finance act, 1994 . [paras 3, 4] In the following cases the discounts are not allowed as deduction from the .....

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..... assessable value for paying excise duty, meaning thereby the discounts will form part of the assessable value as cost and is liable to tax in the hands of the person giving the discount and will not again be liable to tax in the hands of the person receiving the discount. (a) In Orient General Industries Ltd v/s Collector of Central Excise, New Delhi 1984 (12) TMI 303 - CEGAT NEW DELHI - We further observe that as per the clarification of the supreme court reported in 1983 (11) TMI 70 - SUPREME COURT OF INDIA (Union of India and others v. Bombay Tyres International Ltd.) The nature of the discount should be know at or prior to the removal of the goods. In the case it is not possible to determine the quantum discount .....

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..... because it is based on a target figure to be found by the appellants at a future date. We are therefore of the firm view that the appellants are not entilled to any deduction on the ground of incentive bonus discount, which was contigent is nature. (b) In S.S. Miranda Ltd v/s Union of India 1985 (4) TMI 78 - BOMBAY HIGH COURT - Valuation Trade discount Surprise Incentives not known at or prior to the time of removal of goods but contingent upon customer s purchasing a particular quota and during a particular period . not deductible as trade discounts from sale price section 4 (4) (d) (2) of central excises and salt Act, 1994. The trade discounts if they are to be allowed as deductions from the sale price m .....

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..... ust be known at or prior to the removal of the goods. Judged on this criterion the discounts claimed for none the periods are permissible as deduction. As regards the period upto 31st May, 1983, admittedly the petitioner s customers were not even aware that there was going to be any such incentive scheme since it was announced for the first time only by a circular dated 23rd May, 1983. Similar is the situation with regard to the period from July to October, 1983, for the incentive was announced for the said period only by the circular dated 1st November, 1983. The customer are, therefore, obviously unaware of any such incentive at the time they cleared their individual consignments during the said three months. The only period for which it .....

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..... can be said that, the customers were made known of the said incentive scheme was the period of three months viz. June, November and December, 1983. All that however can be said with regard to the said three moths is that the petitioner s customers were aware that there was some such incentive scheme operative during the period. But even with regard to those three months it can hardly be said that they knew at the time they cleared the individual consignments during the said three months, the quantum of discount that they would be entitled to. In fact at the time they cleared the specific consignments during the said three months they would not even be sure that they would get any discount at all. In other words the incentive was not as matt .....

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..... er of course accompanying each purchase was more in the nature of a contingent benefit. It could hardly be described as a trade discount. Both the circulars did not make a secret of the fact that they were both surprise and incentive schemes . At best this was a profit sharing scheme between the petitioners and their customers on the customers reaching the targets of purchase . Therefore, the petitioners are not entitled to claim any deduction on account of their said surprise incentive scheme for the year 1983. In view of the various judicial decisions incentives have escaped taxability under service tax law on the dominant contention that incentive is a sort of profit sharing agreement or that mere receipt of incentive does not resul .....

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..... t in implied existence of promotion and marketing of goods or services. In post GST regime also these decisions holds an utmost importance, however, the time will tell about the exact implication of taxability of incentives. CA Akash Phophalia 9799569294 ca.akashphophalia@gmail.com - Reply By RAJIV MATHUR as = Kindly update the latest position as on date on Taxibility of Incentives under GST regime. Rajiv Mathur Dated: 14-9-2018 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax .....

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