Reversal of common ITC as per R/42 on Incentive received in Form of Foreign Tour

[ANKIT SHAH]

Whether incentive received by the Distributor in the form of Foreign Tour from the Principal Supplier (say for eg. manufacturer) will be treated as Exempt Supply. If yes, then whether thre will be reduction of common ITC as per R/42?

[Shilpi Jain]

Not an exempt supply. Incentive is in the nature of a discount.

No reversal of credit for the distributor.

Reduction of common ITC? not clear in query.

[ANKIT SHAH]

If the incentive was received by way of a CN, then agreed that it is a discount.

Here, the incentive is in the form of a Foreign Tour on which TDS is deducted by the Principal Supplier which forms part of revenue in Form 26AS because of which it is taken under the head "Other Income"; hence the query whether such incentive which is booked under the head "Other Income" will be treated as Exempt Supplies under GST.

If it is to be treated as an exempt supply whether the reversal of ITC on common expenditures in P&L A/c will be applicable as per Rule 42 of the CGST Rules?

[KASTURI SETHI]

'Incentive' is called incentive irrespective of the mode of payment whether in kind or in cash  or  credit notes or in any other form. 

[KASTURI SETHI]

The issue is not litigation-free.   Recently one of my clients has received SCN on the incentive issue.

[Vijay kumar]

There is no supply by the distributor in the case of foreign tour done by him which is organized by the principal supplier as incentive. Hence the question of exempt supply does not arise, in my view and hence Rule 42 reversal will not arise.  

[KASTURI SETHI]

I agree with Sh, Vijay Kumar Ji. SCNs are being issued regularly on the incentive issue by the department. 

[Shilpi Jain]

Incentive maybe monetary or non-monetary. If given in money terms, then instead of giving actual money a credit note is issued. 

Say in case, instead of giving a trip, if some goods (say a car) was given to the distributor.

In that case, it would be in the nature of supply by the mfr - though consideration is only the price that the distributor has already paid for the initial goods. Further this is as a part of obligation and cannot be treated as a gift.

More like the clarification given for buy 1 get 1 free in a circular already issued by CBIC.

In my view, no further tax liability , not an exempt supply and ITC should also be eligible.

[Shilpi Jain]

Also have a look at my article in the below link

https://www.taxtmi.com/article/detailed?id=8992

AI Summary

Exempt supply treatment: foreign tour incentives are generally non exempt, so reversal of common ITC under Rule 42 not required.
Foreign tour incentives paid by a principal to a distributor are treated as commercial discounts/incentives and not as exempt supplies; therefore, reversal of common input tax credit under Rule 42 generally does not arise. Classification for income tax (other income) or TDS deductions does not change GST treatment. Where the incentive takes the form of goods supplied by the principal, that transfer may constitute a distinct supply by the principal with separate GST consequences.