Background
Every registered person is eligible to avail credit of input tax charged on any supply of goods or services, which are used in the course or 'furtherance of his business'. 'Furtherance of business' could mean advancement / promotion of business-trade / commerce / manufacture etc. Credit maybe availed on goods/services which are connected with the activities of making taxable supply of goods/services. Such credit maybe availed provided the conditions with respect to possession of tax invoice, receipt of goods, payment of tax and filing returns are fulfilled.
In Section 17 (5) of the CGST Act it deals with blocked credit. Clause (h) of Section 17(5) deals with ITC on gifts. The credit is restricted on any goods disposed off by way of gift and not eligible for ITC. Due to Section 17(5), it is so stipulated that no ITC on any goods can be availed, if they are given as gifts, whether or not in course or furtherance of business.
In this article the paper writer has examined what is meant by 'gifts', in context of input tax credit as well as recent circular and advance ruling in this regard.
What is meant by 'Gift'?
It is well known that there are no free lunches in this world, esp. in business. At the same time, there are several schemes available in the market which promise assured gifts to customers. Such gifts for example could be free cars to purchasers of flats, or giving gold coins for purchases done above certain value by customers.
The term 'gift' has not been defined in the GST law. When a term is not defined under GST, we may refer to the definitions under other laws. The Gift Tax Act has defined the word 'gift 'to mean transfer by one person to another of any existing moveable or immoveable property voluntarily and without consideration in money or money's worth.
The Supreme Court cited the definition of 'gift' from Corpus Juris Secundum, Volume 38 in Sonia Bhatia v. State of UP [1981] 2 SCC 585 as follows: A 'gift' is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefore. A 'gift' is a gratuity and an act of generosity and does not require a consideration, but there can be none; if there is a consideration for the transaction, it is not a gift.
It can be concluded from above that gift is gratuitous and does not require consideration. Conversely if consideration is attached to any transaction, it cannot be called as gift. Love and affection maybe non-legal consideration in respect of a gift, but there cannot be monetary consideration for a gift. Further gift cannot arise under a contractual obligation.
Restriction on availment of credit on gifts
Section 16 of GST Act gives conditions for availment of credit on goods/services used in course of business. Section 17(5) of the CGST Act sets out the blocked credit list. In section 17(5)(h), ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Section 17(5) itself starts with a non obstante clause, which means even if Section 16 allows the credit, as conditions for taking of credit are satisfied, but Section 17(5) shall block the credit in respect of certain cases. Moreover, Section 17 (5) is a specific provision. It is an established principle that specific provision prevail over general provisions. This doctrine has always been upheld. The cases on the subject would be found in the Third Edition of Maxwell which is 'generalia specialibus non derogant' - i.e. 'general provisions would not abrogate special provisions.'
If there is dispute between Section 16 and Section 17(5), then Section 17(5) over rides Section 16. In other words, if something qualifies for ITC under section 16 but is blocked from ITC under section 17(5) then ITC would not be available.
ITC on goods given away or disposed as 'gifts' should not be available when no tax is being paid on their disposal, even though such gifts are given in course of business of supply of taxable goods/services.
The intention which is behind the restriction given in Section 17(5)(h) seems to be that it tries to restrict people from giving benefits- in kind or in lieu of cash/ goods nomenclated as so called 'gifts'to avoid levy of GST. When gold coins/other items are given as free supplies without consideration in course of business, then it maybe covered as 'gifts' and ITC restricted on same.
In a different scenario, a business man may give branded diaries/calendar at New Year time, given for publicity, target based schemes where items such as fridge/TV etc are given as incentives under promotional schemes for distributors/retailers. Whether such goods which are given can be said to be gifts or goods given which are related to business?
When such items are not given unless customer satisfies certain criteria laid under scheme, then it may be said to be given in course of business. Such goods given to customers, may not satisfy conditions to treat as gift when-
- giving away such items to customer is not a voluntary act nor
- as a gift distributed to customer.
When the goods nomenclated as 'gifts' are given as measure of sales promotion or are given for reaching certain sales/turnover targets, then it maybe said to be given 'in course of business 'and may not actually be 'gifts' but given under contractual obligations. The input tax credit may be availed on such goods given away for marketing/promotion to dealers by the supplier. However the supplier who avails credit on such goods given as sales promotion measure, has to have document to establish why it is not gift, to ensure the credit on such goods is not denied at future date.
An additional aspect which may have to be seen is if the said goods are given as consideration[non-monetary] in exchange for the sales promotion/marketing services supplied by the customer such as a distributor to the manufacturer. Further if the goods are given as barter against such supply of promotion services by customer, then the manufacturer has to raise tax invoice charging GST on the goods given away and may avail corresponding credit as well.
Impact when value/consideration is assigned to item given nomenclated as gift
Under GST law, the intention is to restrict the credit in scenario where there is no outward supply. When the item is merely called as 'gift' but there is extra commercial consideration for same, then it is treated as supply of goods for a consideration, taxable to GST. Once it is taxable supply, corresponding credit maybe availed.
Further Schedule I of GST Act, deals with activities to be treated as supply even when done without consideration. Supply of goods/services between distinct/related persons is deemed as supply even when done without consideration. In light of this entry, supply of goods is in course or furtherance of business, between related persons/branches located in different states is treated as supply, even when done without consideration.
Employee is related person of employer-company. However there is exemption for gifts not exceeding Rs 50000 pa given by employer to employee. When gifts given exceeds Rs. 50000 per employee per year, it is taxable to GST.
Relevant aspects on promotion schemes- Circular No. 92/11/2019-GST
Free samples and gifts
Where the activity of distribution of gifts falls within the scope of supply on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.
Buy one get one free offer:
1. Sometimes, companies announce 'Buy One, Get One free' offers. For example, buy one soap and get one soap 'free'.
It may appear that one item is being supplied 'free of cost' without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can be treated as supplying two goods for the price of one.
2. Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined accordingly.
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.
Paper writer note: Example-for mixed supply, when fridge is given as 'free' when AC is purchased, where single price is charged, taxed at highest applicable rate of tax
Gift by Employer to Employee
When an employer gives a gift to an employee, and the value of the gift does not exceed Rs. 50,000 per employee in a financial year, the employer must reverse the ITC on the GST. However, if the value of the gift exceeds Rs. 50,000, the employer is required to pay output GST on the excess value.
Gifts like gold coins and home appliances to distributors
Companies use incentive schemes to promote sales among distributors or customers. These gifts are provided without any monetary consideration. As such, ITC is not available to the company for the procurement of these items. Additionally, the company is not obligated to pay GST on the distributed gifts, as they do not meet the supply criteria under GST regulations.
Recent Advance ruling on gifts
In Biostadt India Ltd (Dated: December 20, 2018) 2019-TIOL-59-AAR-GST
Facts: The gold coins distributed to the customers at the end of the scheme for achieving stipulated lifting or payment criteria.
Issue: Whether credit is available on gold coins given to customers when they satisfy certain conditions?
Held: ITC not admissible on procurement of Gold coins. ITC not available on gifts' when no GST is being paid on their disposal, section 17(5) of the CGST Act, 2017 blocks such credits: AAR
Note:
Advance ruling is applicable to assessee who has sought it and to his set of facts
It has limited persuasive value for others, unless it is in line with provisions of GST law.
Conclusion: In light of specific restriction on credit on gifts, the companies may take call to go for discount instead of promotional items as a business decision, to be done based on customer preferences.
The author can also be reached at roopa@hiregange.com
Also read: Discussion On ITC Of Diwali Gifts
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