February 5, 2019
In today’s competitive and challenging business environment, discounts and rebates are important promotional tools employed by manufacturing companies to promote the sale of products and stay ahead of competition. Amongst other strategies adopted by companies in expanding their market share, discounts and rebates have proven to be effective in ensuring companies increase their profitability, which also means more tax revenue for the government.
The above notwithstanding, tax authorities in Nigeria usually view discounts and rebates with skepticism. Sometimes, they seek to adjust the income tax computations of companies with the aim of de-recognizing the discounts and rebates and treating them as taxable items. This position can be quite punitive as it penalizes companies for offering discounts and rebates to grow their business notwithstanding that the Government might have enjoyed additional tax revenue from the increased profit.
In this article, we have highlighted the tax implications of discounts and rebates, the controversies surrounding their adoption and practical challenges for taxpayers.
The Black’s law dictionary defines discount as a reduction from the full amount or value of something especially, price while rebate is defined as a return of part of a payment, serving as a discount or reduction. In practice, both words are used inter-changeably to mean a reduction in the sales price of a product. In the event that other factors such as quality and packaging, are the same between two competing products, available discounts might be the only consideration in making a choice between the two products. Companies adopt different types of discounts to promote their products. These can be classified into two broad categories; volume and cash discounts.
Volume discounts are granted to customers to encourage large purchase of goods. It is widely used to reward customers who meet certain sales target within a specified time. For example, a company may give a certain percentage discount to customers who purchase five thousand cartons of products within the first quarter of the year. Where a customer meets this target, the company will credit the customer’s ledger account with the discount amount, which can be used to purchase more products in the future.