As per the circular issued by the government, the treatment of trade discounts and credit notes under the Goods and Services Tax (GST) regime; however, the experts caution that it may shift compliance and cash flow burdens onto FMCG distributors.
Credit Notes and GST ITC
According to GST circular 251, financial or commercial credit notes issued without GST do not mandate distributors to reverse their input tax credit. Businesses under GST ITC can offset tax paid on purchases against the GST they owe on sales.
The same situation furnishes certainty for manufacturers, and distributors are encountering issues. Various people carried on to hold excess ITC balances that they could not use wholly, tying up their working capital. At present, there is no refund procedure for these collected ITC, which leaves distributors helpless to liquidity issues until the proposed amendment to Section 15 of the CGST Act is implemented.
At the 56th GST Council meeting, the revision was discussed, which may permit GST credit notes without the need for a pre-sale invoice linkage, thereby supporting the reduction of ITC accumulation for recipients.
Trade Discounts Effect
The circular trade cites discount regulations. No other GST shall take place when manufacturers support dealer costing. Dealers need to include the support in the taxable value and pay GST if discounts are given to consumers. Unless supported via a separate agreement and fee, routine dealer promotions remain exempted.
Industry Reaction
On GST rate cuts and ITC treatment clarifications from the Central Board of Indirect Taxes and Customs (CBIC) have been sought by the All India Consumer Products Distributors Federation (AICPDF), representing 4.5 lakh distributors and serving over 1.3 crore kirana stores.
Problems have been exhibited by the federation after the implementation of GST rationalisation from September 22, which rolled out a dual rate structure of 5% and 18%. It cited a peculiarity in the detergent segment- On the detergent cakes, the GST has been reduced to 5%, but there is an 18% GST on washing powders that affects consumers.
Read Also: CBIC Cir. 251: No ITC Reversal on Post-Sale Credit Notes Issued by Suppliers
AICPDF National President Dhairyashil H Patil cited that, “While we welcome these reforms, urgent clarifications on input tax credit and anomalies like detergents are essential to ensure benefits reach consumers and avoid disruptions in retail trade.”
Outlook: Manufacturers gain regulatory certainty, distributors will see pressure on cash flow till legislative changes and further clarifications come into force. The reply of the government shall be witnessed by FMCG stakeholders as the dual GST rate regime is wholly executed.
