GST on Incentives: Tax Rates and HSN Code

In a traditional distribution format, a forward supply chain comprises networks of entities including manufacturers, stockists, wholesalers, and retailers. Business incentives, such as discounts, are a common trade practice among these entities. But is GST applicable to sales incentives?

This article discusses and explains the types of trade incentives, the implications of GST on incentives, and the GST rate on incentives received. 

Key takeaways

• Applicability of GST on incentives depends significantly on the nature of an incentive and the underlying conditions.
• GST is applicable only when incentives are part of the consideration for services separately provided by the recipient (e.g., promotional activities).
• When incentives are pure price reductions, GST does not apply. This includes pre-agreed in-bill discounts or volume discounts adjusted through credit notes on original invoices.
• Businesses must understand these distinctions to ensure compliance and avoid penalties. 

What are the Incentives, Discounts, and Schemes Offered by Suppliers?

In trades, people often equate incentives with discounts and schemes. Though they carry different meanings in a trading context, they can have different tax implications for suppliers and buyers.  

• Incentives - These are benefits suppliers offer to their dealers for meeting specific, pre-determined goals. So, it is performance-linked and does not necessarily involve a simple reduction in price. The purpose of offering incentives to dealers is to motivate and influence their sales performance. Sometimes, incentives are also offered for non-sales performance, such as brand promotion and fostering customer loyalty among end-users - for example, A financial reward for dealers achieving 10% more business than the previous year. 
• Discounts - Unlike incentives, discounts are straightforward concessions or reductions in the listed prices of goods and services for dealers. The purpose of offering discounts is to increase the uptake immediately or reward dealers on the spot for specific actions. However, suppliers may mandate dealers to fully or partially pass on discounts to end-customers —for example, a 10% discount on the listed price for purchasing beyond a specific volume. 
• Schemes - Compared to incentives and discounts, schemes are more structured, standardised, broadly available and time-bound arrangements. Suppliers can adopt schemes to achieve specific business objectives. However, the nature of schemes can be either a discount, an incentive or a mix of both - for example, an Extended credit period or a special financing arrangement to increase the offtake before a festive season. 

What is GST on Incentives?

Applicability of GST on incentives can be a complex issue. The possible reason behind the complexity is the fundamental nature of incentives as 'generation/addition of value'. Taxability of this additional value depends on the existence of an explicit contractual obligation as an eligibility for claiming an incentive. However, sometimes tax authorities assume that driving sales over and above the regular business volume requires additional effort (services) from dealers. So, incentives can be considered as payment for additional effort as the supply of 'services'.  

Types of Incentives and GST Implications

The implication of GST on incentives provided to customers (e.g., depots, stockists, wholesalers, and retailers) in a forward supply chain is crucial, as it affects tax liability on the recipients of supplies. Failure to comply with GST rules in this regard and underpayment of taxes may result in unnecessary hassles. 

As per the GST Act, 2017, GST is applicable on the value of a supply of goods and services made in exchange for consideration, such as money or a money equivalent. So, for incentives, the GST is applicable only when it is part of a 'consideration' for a specific supply of 'services'.

Some of the common types of trade incentives are:

• Volume discounts - These incentives can be offered as simple trade discounts for purchasing in large quantities, or they can be provided post-supply as part of services, such as selling a certain number of items. GST is not applicable as long as the volume discount is a simple pre-sales trade discount. For post-sales volume discounts, GST is not applicable when manufacturers (suppliers) adjust the original supply invoice, adjust their GST liability, and issue a credit note to dealers (recipients). 

Example: In-bill discounts agreed upon before sales, or purely trade incentives such as volume discounts, e.g., a 10% discount on the purchase of a pack of 40 kg lentils and a 15% discount on the purchase of 10 packs of 40 kg lentils.

• Target incentives - These incentives are mostly part of the considerations for achieving periodical business targets. GST is applicable. Dealers are required to raise invoices for such incentives and levy 18% tax. 
• Promotional incentives - Suppliers may offer special credit terms or other financial benefits to dealers for hosting promotional events or installing branding instruments at dealers' premises, etc. GST is applicable at 18% on such promotional and marketing support as a supply of services.  Dealers, wholesalers, stockists, and retailers will raise the invoice for supplying these services to manufacturers (the supplier) of underlying goods or services.

Example: A manufacturer of air conditioners offers incentives to its dealers for selling a specified number of ACs within a specified time period. 

GST Rate and HSN Code for the Incentive

Incentives are taxable at 18% GST if they comprise consideration for services, namely "Agreeing to do an act", provided by dealers to the manufacturers/stockists/distributors. The corresponding HSN code is 999792.