The Value Added Discount(ing) of Taxes!

The Value Added Discount(ing) of Taxes!

The Value Added Discount(ing) of Taxes!

The term ‘Discount’ typically represents reduction of cost of goods or services and is offered by businesses to augment such supplies. Discount can occur and can be provided by the business either prior to sale or post-sale and therefore lies the concept of pre-sale or post-sale discount. While post-sale discount may also be interchangeably referred to as ‘rebate’ as it means the same thing - that is to pay back part of an amount already paid to buy something. Also, when a transaction occurs at a B2B level, rebate is also referred to as ‘incentives’ or ‘commission’ in a colloquial way.

 While, without an iota of doubt we are clear about the understanding of the impact of pre-sale discount under Value Added Tax (VAT), however post-sale discount makes for an interesting case to discuss. Post-sale discount is usually part of offering by the Automobile, FMCG and Pharma sector companies. The dealer receives such post-sale discount from the companies either in the form of price support for slow moving items or as part of promotional offer to generate sales volume with respect to a given product. Further, there could be conditions attached to such receipt of post-sale discount by the dealers –

1) to pass on the benefit to ultimate customer;

2) keep the benefit with them.

Let us analyze the impact of such post-sale discount under UAE, KSA and Indian VAT laws.

A) UAE VAT Laws:

As per Article 28(2) of UAE VAT Executive Regulation, it provides that the value of supply may be reduced in case of discount upon fulfillment of following two conditions:

  a. The customer has benefitted from the reduction in price;

  b. The supplier funded the discount

Referring to the above provision, where a company has provided discount to its dealer (customer) and such dealer has been benefitted from receipt of such discount, the given conditions are met. Therefore, value of discount would be reduced from the original value of supply by providing tax credit note against original tax invoice to the extent of discount offered by the company to their dealer. The given provisions although do not seem to be clear in situation wherein the ultimate benefit of such discount (either the same or different value – more or less, on comparing it with discount received from the company) received from the company is further passed on by the dealer to their own customers.

For Example: A company is selling car to dealer at AED 70000 and dealer in turn sells the same to customer at AED 80000 after keeping a margin of AED 10000. In case of low demand for an old variant of a car, the company offers post-sale discount to dealer – let’s say the discount is AED 20000 and as per agreed terms between the company and dealer, the dealer extends the same value of discount to its customer and sells the car at AED 60000 after keeping his margin of AED 10000 as was the case in absence of receipt of discount. On referring the above provision, the dealer is not benefitted from the reduction in price as his margin before or after receipt of discount remains the same i.e. AED 10000 - so does that mean VAT is to be paid on original value of car i.e. AED 70000 collected by the company from the dealer. Would input VAT in full be available to dealer in spite of receiving back part of the invoice value paid to the company in the form of discount. If answer to these questions is yes then this may be a revenue neutral exercise as input VAT would be available in full to the dealer. However, cash flow of dealer may be impacted. Separately, whether the two transactions - 1) Company to Dealer and; 2) Dealer to Customer, are required to be seen independent to each other even though the agreement between the company and dealer specifies to extend the same value of discount to the customer of such dealer - thereby stating that dealer and customer have been independently benefitted from the discount provided by company and dealer, as the case may be.

B) KSA VAT Laws:

Article 40(1)(c) Executive Regulations read with guidance provided under ‘VAT General Guideline’ clearly provides for adjustment of original value of supply in case of offer of additional discount after sale without any further conditions attached to it. Therefore, a tax credit note against the original tax invoice is required to be issued to adjust the original supply value in case of such post-sale or retrospective discount.

C) Indian GST Laws:

Post-sale discount under Indian GST laws has had a topsy-turvy journey so far. Section 15(3)(b) of CGST Act, 2017 lays down the following conditions to allow reduction of post-sale discount from the original value of supply:

  1. Provision of discount is agreed under the terms of agreement entered at or before the time of supply and is linked to relevant invoices.
  2. Input VAT attributable to such discount has been reversed by the recipient on the basis of document issued by supplies.

In respect of post-sale discount under GST, Indian tax authority had issued a clarification vide Circular No. 105/24/2019-GST dated June 28, 2019 (Please note the said clarification was withdrawn on October 03, 2019 vide Circular No. 112/31/2019-GST after vociferous disagreement stemming from the industry, however, it is worthwhile to understand views of the authority in respect of post-sale discounts – one of the view of authority probably coming out of this circular was to avoid discounting of taxes particularly where the recipient of supply is an unregistered party).

Although, under all the below mentioned scenarios as provided in the said circular, the exercise is revenue neutral in nature considering the recipient is able to fully claim input VAT, however from a compliance perspective, it becomes relevant to understand each of the scenarios. The said clarification provided for the following:


                        Incidence of GST

Post-sale discount provided by the company to dealer without any further obligation or action required at dealer’s end.

Such discount value would not be included in the value of supply in the hands of the company i.e. discount would be allowed as a reduction from the value of supply and the company shall issue tax credit note to the dealer to the extent of discount.

Post-sale discount provided by the company to dealer where the dealer is required to perform certain act in return like undertaking special sales drive, advertisement campaign, exhibition, etc.

Such discount would be considered as supply of service by dealer and subject to GST. Company would be eligible to claim input VAT.

Post-sale discount provided by the company to dealer in order that the dealer in turn can provide special reduced price to the customer.

Post-sale discount provided by company to dealer together with consideration payable by the customer would be added to compute value of supply in the hands of dealer and accordingly to compute GST. The customer, if registered, would be eligible to claim input VAT of the tax charged by the dealer to the extent tax is paid by the said customer to the dealer.


From the above, key take away points in respect of post-sale discount are that the agreement entered between company and dealer at or before time of supply should clearly provide for such discounts and input VAT should be reversed by recipient of supply on receipt of tax credit note from the supplier to the extent of such discount.


From the perspective of UAE VAT laws, there lies sufficient ambiguity in interpretation of the provision to give effect to the treatment of post-sale discount. Further, in cases where the company is in receipt of sales promotion/marketing services from the dealer in order to augment the sales volume, the dealer may be required to raise tax invoice on the company, being the supplier of services – although there could be an overlap in meeting the milestone for earning of consideration by providing marketing services: a) by way of a separate consideration or, b) earning consideration in the form of post-sale discount (as marketing efforts would indeed lead to increase sales volume and consequent earning of discount by dealer).

Therefore, the agreement entered between the company and dealer must lay clear clauses of performance of activities by each of the parties and the consequent flow of consideration. It is observed that, at times in the absence of appropriate clauses under the agreement, consideration towards sales promotion activities performed by the dealer are also provided by the company in the form of post-sale discount. It is therefore recommended that agreement between the company and dealer should be diligently drafted to give appropriate effect to the activity of achieving sales volume and performing of marketing activities by dealer and the consequent flow of consideration.

From the perspective of KSA VAT laws, it is ample clear that post-sale/retrospective discount is to be adjusted from the value of original supply. However, as specified above under UAE VAT laws section, the agreement aspect between the company and dealer can be taken into consideration.

From the perspective of Indian GST laws, for the time being the provisions of section 15(3)(b) of CGST Act, 2017 should be complied with in respect of post-sale discount as no further clarification stands effective as on date. Further, the provisions of law are sufficiently clear to give effect to post-sale discount in trade and commerce.

On a departing note, supply of post-sale discount may not lead to discounting of VAT particularly when the recipient of supply is registered with tax authorities as the exercise is revenue neutral in nature. However, in case where the recipient of supply is not registered, clear demarcation between a) post-sale discount earned due to achievement of sales volume and b) performance of marketing activities independently undertaken by the recipient and consideration earned thereto, should be made (although there lies a thin line of difference separating the two) in order to avoid discounting of taxes!


Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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