Discount practices of FMCG, auto and consumer durable firms face uncertainty due to Coca-Cola GST notice

Hindustan Coca Cola moved the Bombay High court earlier this month.

Discounting practices adopted by fast moving consumer Good (FMCG), auto spares and consumer durable companies face uncertainty due to a goods and services tax (GST) notice sent to beverage maker Hindustan Coca-Cola Beverages.

Earlier this year, GST authorities sent a notice to Coca-Cola, demanding Rs 2,500 crore in unpaid taxes. Hindustan Coca-Cola Beverages is the Indian subsidiary of the US-based drinks giant.

GST authorities alleged that the distributors were giving discounts to suppliers after which Coca-Cola was compensating them.

Earlier this month, Coco-Cola moved the Bombay High Court seeking quashing of the notice. The court on April 1 stayed the proceedings and asked the tax department for replies.

The revenue department is of the view that Coca-Cola is undervaluing the supply by deducting discounts from the value and the discounts are extended to distributors for past sales. This amounts to GST evasion, the tax department has alleged.

It is a common practice among companies to offer several types of discounts in case of prior sales by distributors, legal experts say. The move is usually aimed at rewarding distributors who are high performers.

“If this interpretation is allowed to stand, the fallout will be massive: retrospective tax demands, chaotic litigation, and significant disruption across industries.

“While the Bombay High Court’s stay offers temporary relief, urgent judicial or policy clarity — preferably by way of a specific notification — is critical to prevent such tax overreach and put the uncertainty to rest," said Amit Baid, head of tax at the BTG Advaya law firm.

At the heart of the dispute is the interpretation of Section 15(3) of the CGST Act which lays guidelines for discounting and calculating the value of taxable supply.

Any discount offered by a company to the distributor needn’t be included in the value of taxable supply if it fulfils certain conditions. If such supplies are not included in the value, it reduces the amount supplied and leads to lower GST.

The revenue department is arguing based on Section 15(3) (A), which allows discounts to be provided only where it is offered for current supplies.

Coca-Cola is relying on another provision, Section 15(3) (B), which allows for discounts to be provided even after supply, provided it was calculated based on a pre-existing agreement.

“A combined reading of Section 15(1) and Section 15(3) does not, prima facie, support the allegation of tax evasion. Emphasis must be placed on Section 15(1), which unequivocally provides that the transaction value — that is, the price actually paid or payable for the supply of goods or services where the supplier and recipient are not related and the price is the sole consideration — shall be the taxable value,” said Brijesh Gandhi, Partner, GST Advisory, NPV & Associates LLP. “Hence, the mere offering of such conditional discounts, without evidence of any related party transactions or artificial price suppression, cannot by itself be considered an act of tax evasion.”

Legal experts say post-sale discounts to dealers and distributors are covered under the credit note provisions under the GST law. Post-sales discounts cannot be construed as services under the GST law.

"Extending discounts based upon prior period sales is a common market practice. This has been prevalent in various industries for many years and has not been challenged by the GST authorities,” said Amit Singhania, founder, Areete Law Advisors.

If the GST authorities have a different view, ideally, they should have initiated a consultative process. “Unsettling the settled market practice is not a good precedent,” Singhania said.

“Tax authorities view post-sale discount practices as potentially leading to GST evasion mainly because such discounts can distort the ‘transaction value’, which is the basis for GST calculation. GST is levied on the ‘transaction value’ (the price actually paid or payable). If discounts are not known or agreed at the time of supply and are given later (post-sale), they don’t reduce the taxable value under Section 15 of the CGST Act,” said Prabhat Ranjan, Senior Director-Indirect Taxation, Nexdigm.