By K R Nambiar
The back-end rebates issued by vendors to authorized partners have come under the scanner of the Service Tax (ST) department, and notices have been issued to hundreds of authorized partners of major vendors in Tamil Nadu to cough up ST on all incentives, price protection discounts and rebates received since 2004.
Apart from the ST, interest for the delayed period, plus penalties, are expected to be levied. There is also news that, in a few days, all major partners across the country will receive similar notices.
“This is the biggest issue to hit channels in the country, and it has come at the wrong time because markets are struggling in the wake of recession. Vendors have been controlling the market operating price through back-end rebates, and this mode of incentivization has now been questioned not just by the ST department but also by the VAT department,” said P N Prasad, President, Confed-ITA.
It all started with the VAT department in TN questioning the negative transactions of partners who were billing products at less than their purchase price, and discounting the rebates and other incentives. The inquiry arrived at the conclusion that all incentives are subject to ST because it was interpreted that rebates are a service which the partner provides to the vendor to move stocks. “There is further confusion since the billing is through a distributor, and the rebates are paid by vendors. It is hence difficult to prove that vendor pay-outs are discounts passed on bills issued by distributors,” explained Prasad.
With rebates and incentives accounting to anything from 4 to 8 percent of the turnover of authorized partners, some of them could face penalties that alone could run into crores of rupees.
A partner doing business of Rs 1 crore a month gets on an average 5 percent as rebate from the vendors. Hence, in a year, the partner takes home around Rs 60 lakh of incentives. At 12.36 percent ST, this amounts to around Rs 7.40 lakh. Penalties on delaying ST are levied on a daily basis; there is also the interest levied on delayed payment. “There are sub-distributors whose monthly billings are more than Rs 5 crore for which pay-outs could be over Rs 20 lakh per month. The cumulative penalties and interest over five years could cost them in crores—and some of them have not even booked profits close to that figure over the past few years,” Prasad added.
Other sub-distributor from Chennai confirmed receiving such a notice. “We have received the notice, and we are seeking legal opinion. The amount, along with the penalties and interest, is running into such a high figure that we are not even in a position to pay it under protest. We are hopeful that our vendors will bail us out, and that the government will offer some relief,” said the sub-distributor.
However, such notice has only been served in TN so far. Many resellers believe that regional offices of ST in other states could follow suit. “In Kerala, we are yet to hear about the complaint. However, a year or so back there was a query from the department, and when we sought legal opinion it was clear that, along with rebates, partners need to collect ST.
Since there was no real progress on that query, the issue died down. Still, we will discuss this issue with members to devise a strategy as and when notices get issued to us,” said P K Harikrishnan, President of ACKMADA. |