Experts have highlighted that the recent GST circular, despite bringing clarity on trade discounts and credit notes, has shifted compliance obligations and cash-flow pressure onto FMCG distributors. The circular states that financial or commercial credit notes, which are issued without GST, do not require distributors to reverse their input tax credit (ITC). However, this means that distributors will continue to hold excess ITC balances, which often cannot be fully utilized, effectively locking up working capital.
Indirect Tax Expert Vedika Agrawal noted that manufacturers will benefit from the circular as their past tax payments remain untouched. However, distributors will face difficulties in utilizing their excess ITC balances, which may lead to cash-flow pressures. Another taxation expert, Vivek Jalan, pointed out that there is currently no refund mechanism for accumulated ITC, and the industry may push for a new refund mechanism. However, this would be difficult for the government to allow due to the high risk of misuse.
The circular also clarified the treatment of trade discounts, stating that manufacturers who only support dealer pricing will not incur extra GST. However, if they directly promise a lower price to consumers, dealers must add such support to their taxable value and pay GST on the combined amount. The All India Consumer Products Distributors Federation (AICPDF) has written to the Central Board of Indirect Taxes and Customs (CBIC), seeking urgent clarifications on the implementation of the recent GST rate cuts and the treatment of excess ITC that may build up following the rate reductions.
The federation also flagged an anomaly in the detergent segment, where GST on detergent cakes has been cut to 5%, but washing powders remain at 18%. The industry association represents 4.5 lakh distributors and serves over 1.3 crore kirana stores across the country. Experts noted that the dual concerns raised by distributors and tax specialists underline the challenges of implementing GST reforms, where manufacturers gain certainty, but distributors remain exposed to cash-flow pressures until legislative changes and clarifications take full effect.
The proposed amendment to Section 15 of the CGST Act, discussed in the 56th GST Council meeting, may ease the problem of ITC accumulation at the recipient’s end due to financial credit notes by suppliers. However, this amendment is expected to take effect in about a year, and until then, distributors will continue to face cash-flow pressures. The industry is seeking urgent clarifications and reforms to ensure that the benefits of GST reforms flow smoothly to consumers and avoid disruptions in retail trade.