Buyers no longer need to reverse their input tax credit (ITC) when a supplier issues a post-sale financial or commercial credit note. The Central Board of Indirect Taxes and Customs (CBIC) has clarified that even if payments are made at a discount, the buyer can retain the ITC. This provides significant relief for businesses and helps simplify GST compliance.
A financial or commercial credit note is a tool suppliers use to tweak payment amounts for reasons like rewarding customers with post-sale discounts or special incentives, all while keeping the original taxable value and GST liability unchanged.
The Board, in a circular issued, said that such credit notes do not change the taxable value of supplies, and thus the supplier’s original tax liability will not be amended.
“The recipient will not be required to reverse the Input Tax Credit attributed to the discount provided on the basis of financial/ commercial credit notes issued by the supplier, as there is no reduction in the original transaction value,” the circular cited.
According to the circular, after-sales discounts furnished to dealers by manufacturers shall not be considered as consideration for services. GST will be applicable on the service element when dealers carry out distinct promotional activities, such as advertising or co-branding, under an explicit agreement.
It is a welcome circular since it furnishes the elaboration towards the GST treatment of distinct sorts of discount transactions between manufacturers and distributors/dealers.
Read Also: Easy Explanation of GST ITC Reversal (Non-Payment 180 Days)
With greater assurance, the same explanation supports the industry and trade in executing these transactions and reduces disputes over what has long been a controversial issue. While for the cases that have agreements with end customers to pass on the advantages to end consumers via dealers in the supply chain, the businesses should be required to revisit and address their issues.
Under such elaborations, the businesses need to think about their contractual arrangements and tax positions.
Between trade discounts and promotional services, the precise demarcation of the government shall lessen the interpretational disputes and furnish effective certainty in compliance for the industry, which makes the way for a facilitated GST regime.
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