Central Board of Indirect Taxes and Customs have come out with a clarification vide Circular No. 92/11/2019-GST dated 07.03.2019, clarifying on various doubts regarding treatment of sales promotion scheme under GST. The circular clarifies following points;
(i) It is clarified that samples which are supplied free of cost, without any consideration, do not qualify as 'supply' under GST, except where the activity falls within the ambit of Schedule I of the said Act and thus such free sample/gifts etc. shall not attract GST.
(ii) It is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.
(iii) It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers like buy one get one free, free offer with certain supply etc.
(iv) On discounts including 'Buy more, save more' offers, the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.
(v) It is that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. There is no impact on availability or otherwise of ITC in the hands of supplier in this case.
The purpose of this paper to examine the clarification No. 2 which clarifies that input tax credit shall not be available on free supplies or gifts.
The circular relies upon clause (h) of sub-section (5) of section 17 of the said Act, which provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
One of the primary purposes of Input Tax provisions of GST is eliminate cascading affect of taxes. Any denial of input tax credit on superfluous reasons and biased interpretation of laws shall result in cascading effect of taxes, thereby defeating the very purpose of implementation of GST.
The legal provision says that ITC shall not be available if goods are 'written off or disposed of by way of gift or free samples'. The terms 'written off' or 'disposed of', in business parlance, have specific meaning. "Disposed of" means that an item was discarded, that one no longer has it. "Written off" means that the item was recorded in the financial books as no longer having any value. ITC is deniable only when 'free sample' or 'gift' is of the nature of 'written of or disposed of'.
A court construing a statutory provision must strive to give meaning to every word of the provision. In the Commonwealth v Baume Griffith [1905] HCA 11; (1905) 2 CLR 405 at 414], Chief Justice cited R v Berchet [[1794] EngR 1653; (1688) 1 Show KB 106 [89 ER 480]] to support the proposition that it is 'a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent. 'The proposition/rule stated above is reinforced by a basic statement that 'It is also a primary rule of statutory construction that all words used in a statute are presumed to have meaning and effect. Words used in statutory provisions must be given some effective work to do. Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision has been applied to many cases. A known rule in the interpretation of Statutes that the acceptable interpretation would be one which does not ignore any clause, sentence, or that word shall prove superfluous, void, or insignificant in the process. It is necessary to give meaning to all the words in section viewed their statutory context. Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision to support the proposition that it was "a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent" The principle has been applied in numerous cases by higher judiciary in India.
Section 17(5)(h) used the term- 'written off' or 'disposed of' before free samples or gifts. Are these terms otiose, used in a superfluous manner by the Parliament. Certainly not. Unfortunately, the board circular is silent on the application of these terms. It says,
'Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.'
It can be seen from the clarification itself that no effort has been made by the board to cover the meaning of the term 'written of' or 'disposed of' in the circular itself.
It is to be understood that 'input tax credit' is available for any supply of inputs 'used or intended to be used in course or in furtherance of business'. Supply is not the only activity undertaken by a business. Before supply, numerous activities are done which are not supply. A business undertakes manufacturing activity, marketing activity, after sale service, promotion of goods or services, advertisement etc. Numerous inputs are used in such activities which are not supply. Do we want to say that ITC should be reversed for inputs used in such activities as those inputs are not being supplied through those activities.
Thus, it is irrelevant as to whether the inputs are used in supply activity or not. What is relevant is 'use or intention to use in course or in furtherance of business'. Business is a much wider term than supply. An input may or may not be used for supply; ITC is available as long as it is used or intended to be used in course or in furtherance of business.
Many a times distribution of free samples is a bonafide business activity of sales and promotion of supply. When an input is used in such activities, it cannot be said that those inputs has been 'written off' or 'disposed of', and as such the mischief of Section 17(5)(h) is not attracted. In view of these, we are of the view that the present circular does not lay down the correct position of law. Such circular, rather than clarifying the position of law, confuses the law more. The board should have a relook at the circular in the interest of justice.
The author is managing partner of Rajesh Kumar and Associates and he can also be reached at rajesh@rklegal.org
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