Treatment of incentives under GST law

[Rajat Gupta]

Hello experts,

A taxpayer receives multiple incentives in the form of discounts & promotional activity reimbursements from its supplier without charging GST. The amount of discounts/incentives is separately credited by the supplier through commercial credit notes. Although there is no written agreement for this, the supplier grants a discount based on the monthly purchases made by the taxpayer.

My query is whether the taxpayer needs to reverse GST on the incentive portion or not. If not, can the revenue treat this incentive as consideration received by the taxpayer for some support services to the supplier? 

[Ganeshan Kalyani]

In Sec. 34, the word "may" is been mentioned - indicating the applicability of GST credit note is optional. It is because its applicability is depended on certain conditions. The said conditions are prescribed u/s 15(3)(b) of CGST Act. The condition states that discount given post supply need to be predetermined at the time of entering into an agreement or before the time of supply.

In your case, as you have mentioned, that discount given by the supplier is not determined at the time of supply but it is given basis monthly purchases. Thus, the condition as prescribed u/s 15 is not satisfied and therefore the supplier has issued a financial credit note and NOT the GST credit note. Since, he has not issued GST credit note, you are not liable to reverse your ITC taken on the basis of invoice issued by the supplier.

[KASTURI SETHI]

(i) Perfectly clear reply by Sh. Ganeshan Kalyani, Sir.

(ii) If discount received is with GST effect, then the receiver is required to reverse proportionate credit availed as is attributable to the discount received. When tax has not been paid. nor payable and ITC has not been taken, reversal on what basis ?

(iii) "My query is whether the taxpayer needs to reverse GST on the incentive portion or not. If not, can the revenue treat this incentive as consideration received by the taxpayer for some support services to the supplier ?"

Ans. SCNs are being issued by the department by treating such discounts as income/consideration but this is not legally correct. Such SCN will not align with the definition of transaction value.

As per legal dictionary ""Incentive and "discount" are different concepts. Do not intermingle incentive with discount.

[Rajat Gupta]

Thank you Ganeshan Sir and Kasturi Sir for clarifying the issue. One issue that persists is whether the commercial credit note, issued by the Company mentioning "promotional activity reimbursements", also qualifies as a discount or incentive. There is no adjacent supply against that reimbursement made by the Company. Please clarify on this.

[Raam Srinivasan Swaminathan Kalpathi]

Kindly go through Circular 212 of 2024 and also recent Madras HC ruling in the case of Tvl.Shivam Steels (2024 (7) TMI 1202 - MADRAS HIGH COURT) wherein it was held that 

the Court said that the assessing officer concluded that the taxable person is providing a service to the supplier while taking the benefit of a discount by facilitating an increase in the volume of sales of such supplier. This conclusion is ex facie erroneous and contrary to the fundamental tenets of GST law. Therefore, this conclusion warrants interference, and this issue requires re-consideration....

The Court set aside the impugned order only insofar as defect no.3 relating to reversal of Input Tax Credit for the value of credit notes issued by the supplier is concerned....

 

AI Summary

Suppliers' post-supply discounts without predetermined agreements don't require input tax credit reversal under Section 15(3)(b) CGST Act A taxpayer receives discounts and promotional activity reimbursements from suppliers without GST charges, credited through commercial credit notes based on monthly purchases without written agreements. Legal experts clarified that since discounts weren't predetermined at supply time per Section 15(3)(b) CGST Act, suppliers issued financial credit notes rather than GST credit notes, eliminating the taxpayer's obligation to reverse input tax credit. Revenue departments incorrectly issue show cause notices treating such discounts as taxable consideration, but this contradicts transaction value definitions and established legal precedents including recent Madras High Court ruling in Tvl.Shivam Steels case.