AAR of Maharashtra rules out GST refund for post-sales discounts

In a setback to the common market practice of trade discounts, the Authority for Advance Rulings (AAR) of Maharashtra has ruled out a goods and services tax (GST) refund in the case of post-sales discounts offered by manufacturers to dealers. 

The case pertains to UltraTech Cement, which sought clarity over the possibility of GST refund in the case of discount offered to its dealers after sale. The move is expected to result in a slew of litigation and prompt the industry to re-examine the discount schemes offered to liquidate old inventories or on bulk sales.

The applicant, UltraTech Cement, cites an example where a dealer has to sell a 50 kg cement bag to the final customer at Rs 295, against the original purchase price of Rs 300. The Rs 5 rate difference is compensated for the dealer by the manufacturer. 

“Based on the trade practice and past history, the dealer is aware that there will be compensation in the form of rate difference or trade discount in case of significant correction of prices,” it said. However, AAR ruled that according to GST law, the discount given after the goods have been sold has to be established in terms of agreement signed before or at the time of sale of goods. 

This means that the discount to be given has to be mentioned in the terms of the agreement entered into at the time of sale. “The wordings of section 15 (3) (b) (i) of the CGST Act clearly states that the quantum of discount given after the supply of goods has taken place has to be there in the agreement. It cannot be open ended,” said AAR.

The ruling against the company may discourage such a practice.

There are two kinds of discounts. One, where discounts are offered on the invoice itself and second, when discounts are offered post sale on account of market correction or to liquidate old inventory. While GST benefit is offered in the first case, refund of GST paid is not allowed in the second case.

“In certain cases, due to the highly competitive and dynamic market conditions, the authorised dealers or stockists of the manufacturers have to sell stock at a price lower than the purchase price to continue in business and are in turn compensated for the rate difference by the manufacturer, the application said. For example, in case of mobile phones, older versions are sold at a discount to liquidate inventory. Besides, in case of GST rate reduction from 28 per cent to 18 per cent, manufacturers may offer discount to dealers in lieu of the lower GST rate that they had to offer to the customer on old stock. It is also a common practice within manufacturers to offer discount to traders for doing a certain number of sales during the quarter. 

The GST Council, in the last meeting, reduced rates on a range of items in the 28 per cent category, including refrigerators, small TVs, paints and washing machines.

Abhishek Jain, partner, EY, said, “The aforesaid order of AAR denies GST adjustment/reduction on post sales discount offered by the supplier. This will open another Pandora’s box of litigation.” He added that taxpayers will need to carefully examine their discount schemes and whether the said schemes are entitled to GST adjustment/ reduction or not.