Are back-end rebates issued by vendors to channel partners, trade discounts or bonuses for good services?
A simple definition of a back-end rebate in the channel community is that rebates are essentially bonuses paid by vendor companies to partners who have met sales targets in stipulated or a pre-determined time frame. These are legal transactions, and are logged in the account books. The rebate policy, however, largely applies for volume sales.
The concept is not new. Earlier, vendors distributed the back-end rebate in the form of co-op funds to channel partners who met their sales targets. However, they had to monitor the money and the promotional activities carried out by the partner. But as vendors grew in size and geographies, as their businesses expanded, fund monitoring became a tedious exercise. The concept gradually transformed into back-end rebates, where the vendor does not have to monitor the channel activity. Of course, this suits both the parties.
But that does not mean that the co-op fund is not being used anywhere? A few small vendors are still using the concept for promotion and marketing.
So if things are as simple as they say, what exactly has gone wrong in Tamil Nadu? The service tax department has issued notices to channel partners and sub distributors of the state, and has asked them to shell out the service tax, interest for the delayed period, and also penalties. The delayed period in this case is four years (2004-08), and the total amount payable by some partners can run into several lakhs, and a few cases crores.
What the sales tax department, under whose purview the service tax falls says is that TN partners indulged in negative billing. In its view, discounting/rebates/other incentives are subject to service tax, because rebates are a service which the partner is doing to the vendor to move stocks.’
Many partners acknowledge the issue. P. N. Prasad of Puducherry-based Microplus Computers, and president of Confed-IT, the IT Association of Tamil Nadu, told me that the issue has shaken-up the entire channel in TN. He feels that the vendors are equally to blame because they did not inform the TN channel about the service tax issue. Despite the fact that they paid the tax for channel partners, in cities like Bangalore and Hyderabad. He wants the vendors to bail out the TN channel as well.
It is also a fact that Confed-IT did not smell the rat for the last four years. When I mention this to Prasad, his immediate retort is that the vendors did not even deduct TDS, and so the partners assumed that the payment was a trade discount. Not even a single supporting document was provided along with the demand draft.
Non-payment of the service tax/ (or whether it should be paid) has also brought to limelight an open secret’ wherein the partner indulges in negative billing. I will not get into the details of what negative billing is, as it is a separate issue that I will write about at a later date. A source from the vendor community told me that vendors’ back-end rebates are a global process. These are used to encourage partners perform better vis- -vis competition. So tell me where does the issue of serving us come? he asks me. Different policies and tax structures for different states are complicating matters.
And meanwhile, Prasad is consulting experts from other industries, and senior lawyers. And the channel is waiting for more clarity. What is uppermost in the minds of the partners is, “How do I pay so much money, that too at a time where there is minimal business?” “I will have to shut shop,” is a common echo in TN channel fraternity.
Some partners will have to shut shop, and look elsewhere if the issue is not amicably solved. I hope Prasad and his members reach at an amicable solution with the vendors for the larger benefit of the channel. Because, even if the channels do take the legal route, they will have to pay the service tax even to appeal in the court. The vendors on their part should learn from the issue, and discuss this openly with their partners during forums, in blogs or one-on-one discussion, or even during tutorials. A heart-to-heart discussion in such matters always helps.
While the matter has not impacted the channel community in other states, it is the right time for all associations to form a uniform voice, draft policy, and remain united. It will also help if the Center announces a uniform taxation policy. Hopefully, the government will address the issue when the new finance minister reads his/her budget in the summer of 2009. But for now, there is no clear solution in sight.
And while I am not an expert on such issues, but complex policies and confusing guidelines further aggravate the love-hate relationships between communities, especially where the channel partner is at the receiving end, and the vendor acts evasive. But clarity makes life simpler. What say!!!