FMCG, pharma cos to contest retro tax

MUMBAI: Top FMCG and pharma companies, facing a retrospective tax burden of thousands of crores of rupees for pushing discount sales since 2017, are planning to approach the courts against piling demands for paying the additional producer levy.
In the past few weeks, several distributors and retailers of some of the top FMCG, pharma and consumer durable companies have started receiving notices from the indirect tax department. The authorities want the companies to pay additional GST on discounts offered, or not avail input tax credit on discounts extended to consumers.

ET had on May 10 reported that distributors of Coca-Cola India’s bottling partner Hindustan Coca-Cola Beverages had received notices from the indirect tax department on the discounts offered.

Many companies are liable to paying additional GST on discounts they offered to their distributors or retailers since the uniform producer levy was rolled out in July 2017. The latest central clarification in July says GST be levied on all discount schemes if those were not announced before the goods were sold to distributors or retailers.

In some cases, the tax department has also started issuing notices to distributors and retailers, and some FMCG and pharma companies are seeking to approach the courts in the coming weeks. Also, since the latest government directive is a clarification, it means the tax burden would be retrospective and companies may be asked to even pay interests and penalty.

The new clarification says the authorities would allow only upfront discounts, legal experts point out.

“The recent clarification would mean that unless the company has announced discounts at the time of supply, any subsequent discount will attract GST, either as supply of services or supply of goods. If considered toward supply of goods, no input tax credit will be available to the person who has granted the discount,” said Rohit Jain, partner, ELP.

The clarification has hit all FMCG companies, including some of the top players such as Hindustan Unilever (HUL), Procter & Gamble (P&G), Marico and Parle. The clarification also impacts all sectors, including automobile, electronics and pharma, say industry trackers. Notices, however, have only been issued to distributors of FMCG, pharma and consumer durable companies, sources told ET.

In most cases, companies tend to offer last-minute discounts to distributors and retailers for stock clearance. As per the GST notification, these discounts be either treated as “brand promotion” and 18% GST levied on them, or no input tax credit be allowed.

"GST is a consumption-based tax and be payable by the distributors / dealers on the discounted price to the end customer and not on any value over and above the end-customer price. Commercially, there is also a concern on whether the additional GST, if payable, would be borne by the brand owner or dealers. Notices have been issued to various FMCG and consumer durables dealers," said Abhishek Jain, partner, EY India.

For instance, if a product is sold by a manufacturer to its dealer at Rs 100 and then sold to consumers at Rs 110, GST was levied on the selling price. Say, the company decides to offer Rs 20 discount on the product, then the distributor would reduce the selling price to Rs 90.