The government has questioned the goods and services tax anti-evasion unit for demanding retrospective tax from automobile dealers on discounts received from manufacturers to boost sales, according to a person aware of the development.
The Central Board of Indirect Tax Customs considers such transactions as a discount and not a service, the person told BloombergQuint on the condition of anonymity.
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The Mumbai team of the Directorate General of Goods and Services Tax Intelligence issued show-cause notices to 40 dealers, including sellers of Maruti Suzuki India Ltd. and Hyundai Motor India Ltd.'s vehicles, asking them to pay Rs 83 crore as tax since July 1, 2012, the person quoted above said.
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According to the GST intelligence body, discounts given to dealers or distributors were used for promotional activities and were liable for service tax payment, the person said. The agency, the person said, wants to tax dealers based on the interpretation that they are providing a service to car manufacturers.
Sumit Lunker, indirect tax partner at PwC India, however, told BloombergQuint that if an amount is being offered as a discount by the seller, it cannot be considered as a service offered by the recipient.
Maruti Suzuki and Hyundai India have yet to respond to BloombergQuint's emailed queries.
Secondary Discounts
According to the person quoted earlier, the GST probe agency also asked distributors to pay tax on post-sale discounts—not part of the original sale when the vehicles are sent to dealerships but offered later as an incentive to clear inventory.
Against such discounts, according to the GST law, manufacturers have to issue credit notes to dealers, and pay the tax on the entire amount including the discount.
But the GST probe agency also asked the dealers to pay tax on such discounts, calling it a service to advertise or promote the manufacturers' brand, the person said. And it raised the demand since 2012.
The government, however, said the intelligence body wrongly interpreted the GST law to raise a service tax demand retrospectively when the GST was not even implemented, the person said.
Udit Gupta, partner at law firm Udit Kishan & Associates, agreed. “No tax demand can be raised under the CGST Act for a period prior to July 2017,” he said. “Such demand is not legally tenable and will disrupt the trade. The taxman, he said, should avoid such proceedings.
Has Wider Implications
The issue has widespread implications as similar practices are prevalent among consumer goods makers, according to the person quoted above. The industry needs to be informed about the correct legal position and the stand of the government to avoid litigation, the official said.
In March this year, the government had clarified that consumer goods makers need not pay tax on promotional offers like ‘buy one get one free'. This came after the intelligence body asked these companies to pay tax on goods provided for free in promotional offers.
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