Navigating GST Compliance in Sponsorship Services

Introduction

In the realm of modern marketing, sponsorship stands as a pivotal strategy for businesses aiming to enhance visibility and brand association through events. This is the basic reason that explains why expenditure on sponsorship contributes to a significant chunk of marketing expenditure.

Sponsorship entails providing financial support, products, or services to endorse events, individuals, or organizations, thereby boosting brand recognition. Unlike charitable donations, sponsorships involve reciprocal benefits such as naming rights, logo displays, exclusive booking privileges, or sponsoring prizes - activities that align sponsors closely with the promoted entity.

This article delves into the critical aspects of sponsorship under the Goods and Services Tax (GST) regime in India, as the implications of GST on sponsorship services have a profound impact on both the sponsors and recipients, requiring a comprehensive understanding of the tax regime.

Treatment of sponsorship services under GST

Under GST, the definition of sponsorship draws from its historical context under service tax laws. While not exhaustively defined, sponsorship broadly covers the following activities, as defined under Section 65(99a) of the Finance Act, 1994:

• naming an event after the sponsor;
• displaying the sponsor's company logo or trading name;
• giving the sponsor exclusive or priority booking rights;
• sponsoring prizes or trophies for competitions;

but does not include any financial or other support in the form of donations or gifts given by the donors, subject to the condition that the service provider is under no obligation to provide anything in return to such donors.

Analysis of the definition

• Naming an event after the sponsor (like DLF while sponsoring IIFA Awards, the speaker introduces the event as DLF IIFA Awards). Likewise, we see DLF-IPL.
• Displaying the sponsor company's logo or trading name, like in cricket when there is a match going on and we see Pepsi written at the hoardings all along the ground and on the stumps.
• Giving the sponsor exclusive or priority booking rights like the Honey Singh Concert is going on, and Red FM sponsors the above concert and provides their audience with free passes to watch the function.
• Sponsoring prizes or trophies for the competition, like the Man of the Match, will be provided a car or a Samsung LED television.

Donations and Gifts

Further, donations and gifts are excluded, as they will be provided out of natural love and affection. However, if donations or gifts have been provided with a profit motive in the future, like if a company bears the education costs of Mr. X, the person will have to perform managerial functions in the company after completion of his studies. In such a case, donations and gifts will not be covered by exclusion.

Circular No. 24/2019-20-GGST dated June 11, 2019 provides that donations or gifts given shall not be considered advertisements and not taxable under GST, as per which there should be no reference to or mention of any business activity of the donor that otherwise would have been advertised. Thus, three conditions are required to be satisfied for the non-leviability of GST, namely:

• The gift or donation is made to a charitable institution.
• The payment has the character of a gift or donation.
• The purpose is charity rather than an advertisement.

Hence, the word sponsorship is an inclusive definition, not an exhaustive definition. An exhaustive definition means that no other thing can come beyond its purview. The items listed in the exhaustive definition are only applicable to the subject, whereas in the inclusive definition, the area is wide open and resembled cases will come within its purview.

The activity of providing sponsorship is a supply of service and is liable to GST if it falls under any of the activities mentioned in the definition above and is carried out for consideration.

Applicability of a reverse charge on sponsorship services

In the realm of GST, the liability to pay GST typically falls on the supplier of goods or services, i.e., under the Forward Charge Mechanism (FCM). However, in certain cases, the recipient becomes liable to pay GST to the government exchequer instead of paying it to the supplier of goods or services, following the reverse charge mechanism (RCM) outlined in Sections 9(3) and (4) of the CGST Act, 2017.

In this regard, Entry No. 4 of Notification No. 13/2017-Central Tax (Rate) and Entry No. 5 of Notification No. 10/2017-Integrated Tax (Rate), as amended from time to time, are relevant and read as follows:

The supply of sponsorship services by any person to any body corporate or partnership firm located in the taxable territory is chargeable to GST under RCM.

Supply can be made by any person, but the recipient shall be either a body corporate or a partnership firm to get covered under RCM. Let us understand the term body corporate.

Body Corporate

Paragraph B of Explanation to Notification No. 13/2017, ibid., made reference to Section 2(11) of the Companies Act, 2013, which defined the term 'Body Corporate' as including a company incorporated outside India but does not include:

• A co-operative society registered under any law relating to co-operative societies; and
• Any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf.

Excluding co-operative societies and any notified body corporate, it includes all companies registered under the Companies Act, including companies incorporated outside India.

Further Limited Liability Partnership (LLP) registered under the provisions of the Limited Liability Partnership Act, 2008 is also considered a partnership firm for the purposes of RCM notification.

Therefore, if the recipient of the sponsorship service is a body corporate or a partnership firm (located in taxable territory), including an LLP, then such recipient would be liable to pay GST under RCM. Let us understand the same with the help of the following illustrations:

Illustration 1

Supplier of sponsorship services: A2Z Events (a business entity)

Recipient of sponsorship services: Company B (a body corporate)

• Company B enters into a sponsorship agreement with A2Z Events to promote its products during an event. The consideration for this sponsorship service is Rs. 1,00,000/-.
• This transaction falls under RCM as Company B, being the recipient of sponsorship services, is a body corporate.
• Company B, being the recipient of the sponsorship services, is required to pay the GST on behalf of the supplier, A2Z Events (a business entity).

Illustration 2

Supplier of sponsorship services: A2Z Events (a business entity)

Recipient of sponsorship services: B&T Traders (a business entity)

• B&T Traders enters into a sponsorship agreement with A2Z Events to promote its products during an event. The consideration for this sponsorship service is Rs. 1,00,000/-.
• A2Z Events, being the supplier of the sponsorship services, is required to collect the GST from B&T Traders and pay it to the government under FCM (business entity).
• Here, RCM will not attract recipients of services because it is neither a corporate body nor a partnership firm.

Exemption from sponsorship of specified sporting events

Certain sponsorships, particularly those involving specified sporting events, enjoy exemptions from GST. The list of sporting events whose sponsorship has been exempt under entry no. 53 of notification No. 12/2017-Central Tax (Rate), as amended from time to time, is as follows:

• by a national sports federation or its affiliated federations, where the participating teams or individuals represent any district, state, zone, or country;
• by the Association of Indian Universities, the Inter University Sports Board, the School Games Federation of India, the All India Sports Council for the Deaf, the Paralympic Committee of India, or the Special Olympics Bharat;
• by the Central Civil Services Cultural and Sports Board;
• as part of national games, by the Indian Olympic Association; or
• under the Panchayat Yuva Kreeda Aur Khel Abhiyaan Scheme.

Availing ITC on RCM Tax paid on sponsorship services

ITC on the tax paid under RCM for sponsorship services can be availed by the recipient as per Section 16 of the CGST Act, 2017, if the services are availed for effecting taxable supplies (including zero-rated supplies).

However, it's essential to note that if sponsorship services are obtained from an unregistered supplier, the recipient must raise a self-invoice as mandated by Section 31(3)(f) of the CGST Act, 2017. Input tax credit can only be claimed based on this invoice, subject to payment of tax.

Advertisement vs. Sponsorship

Distinguishing between advertisement and sponsorship is crucial under GST, where advertisement falls under FCM while sponsorship typically falls under RCM. Clear contractual delineations are essential to avoid misconstruing sponsorship as an advertisement, thus ensuring correct tax treatment.

The differentiation lies in the object of the contract, i.e., if the payee offers publicity and the payee contributes directly and inextricably to publicity as the purpose of the payment, then it is advertisement. But if publicity is incidental and the purpose of the payment is to defray costs incurred or expected to be incurred by the payee, then it would be sponsorship.

Brand promotion vs. sponsorship

The term 'brand promotion' is not defined under the GST Act, 2017, but reference can be made to the service tax regime where the service of brand promotion was a declared service and it was covered under Section 65(105) (zzzzq) as below:

"Taxable service" means any service provided or to be provided to any person, by any other person, through a business entity or otherwise, under a contract for promotion or marketing of a brand of goods, service event, or endorsement of name, including a trade name, logo, or house mark of a business entity, by appearing in advertisements and promotional events or carrying out any promotional activity for such goods, services, or events.

Explanation: For the purposes of this sub-clause, "brand" includes a symbol, monogram, label, signature, or invented words that indicate connection with the said goods, service, event, or business entity.

In this regard, a ruling by Gujarat AAR in the case of M/s. Indian Society of Critical Care Medicine [1] is found relevant, which ruled that:

''24. Tax Liability for Showcasing the name, logo, or brand of other persons by ISCCM.

i. We hold that a suitable place for any entity to promote itself is at sponsored events such as trade fairs, exhibitions, and events such as the Criticare conference. Such entities benefit immensely by highlighting themselves before prospective customers in the said critique conference. These companies pay consideration to ISCCM and, in return, get their name, logo, or brand on stage: backdrop, standby, taxi, e-rickshaw, chair head, rest cover, itinerary, bottle wrapper, logo in media, stationery, etc.; display of their brand in a souvenir for the event (space will be allotted in the souvenir); presentation (for a specific time slot); and DVD display. The essence of this service is the sponsorship service.

ii. ISCCM supplies sponsorship services to its respective customers, which find entry at SAC 998397 under the category of 'Sponsorship services and brand promotion services'. We note that with regard to sponsorship services, GST liability is on the reverse charge mechanism of the service recipient when the recipient is located in the taxable territory, as per Notification 13/2017-CT(R) dated June 28, 2017. We find the supply in this regard to be sponsorship service supply and dismiss ISCCM's submission that this supply is brand promotion supply.''

A similar ruling was given by the Rajasthan AAR in the case of M/s. All Rajasthan Corrugated Board and Box Manufacturers Association [2].

Thereby, the activity of sponsorship is wide enough to include brand promotion and attract GST under RCM.

ITC reversals

Organizations that are providing sponsorship services are having a negative impact on their ITC, as they are required to reverse their ITC by virtue of Rule 42 of the CGST Rules, 2017 to the proportion of exempt supplies [3], where goods and services are used partly for effecting taxable supplies (including zero-rated supplies) and exempt supplies.

For the purposes of Rule 42, the value of exempt supplies shall be such as may be prescribed under explanation 1 of Rule 43 [4], and shall include supplies on which the recipient is liable to pay tax under RCM, transactions in securities, the sale of land, and, subject to Paragraph 5(b) of Schedule II, the sale of a building.

Thereby, the supplier of sponsorship services (where liable to GST under RCM) is required to reverse common ITC as per Rule 42. Let us understand the same with the help of the following illustration:

Mr. X has organized a musical event in December 2023 in Mumbai, and in that event, SPONSOR Private Ltd. is giving sponsorship of ₹ 500,000/-. ITC reversals are computed as below:

Mr. X will raise an invoice for sponsorship service of ₹ 5,00,000/- (without GST) on SPONSOR Pvt Ltd, who will pay GST @ 18% on ₹ 5,00,000/- (under RCM), i.e., ₹ 90,000/- tax implications.

Analysis of tax implications

• In the above illustration, we can clearly see that Mr. X is receiving an amount of ₹ 5,00,000/- as revenue, and he is reversing the ITC of ₹ 12,00,000/-. There is no way to justify the logic behind reversing ITC for more than the revenue you have received.
• The government is collecting revenue of ₹ 90,000/- from Sponsor Ltd. and disallowing credit of ₹ 12,00,000/- to Mr. X. This implies that the government is earning revenue (direct and indirect) of ₹ 12, 90,000/- on transactions of ₹ 5, 00,000/-, which shows that double taxation is not completely eradicated from the system.

Reversal of ITC in cases where sponsorship service is provided by a registered person doesn't appear lawful, and it is well expected that this anomaly will be fixed by the GST Council very soon to ensure that double taxation on a single transaction is avoided and loss of ITC to the service provider is minimized.

In light of the above discussion, it is expected that in the coming GST Council meetings, one of the following two actions can be taken:

• The exception of sponsorship services will be added to the deeming provision under Section 17(3), or
• Amend RCM notification for keeping SPONSORSHIP service out of reverse charge.

Any one of the above actions would result in excluding sponsorship services from exempt supply while calculating reversal under rules 42 and 43.

Recipient's Registration Requirement

In general, every supplier needs to get registered under GST. However, small businesses with an aggregate turnover below the threshold limit are exempt from registration. On the other hand, a person required to pay tax under RCM must obtain compulsory GST registration. If the recipient of sponsorship services is unregistered, they must register within 30 days of receiving the services and comply with GST provisions.

Applicability of reverse charge on SEZ units

Are SEZ units also required to discharge tax under RCM on supplies liable under RCM?

Wherein clarification was sought as to whether the SEZ unit is liable to pay GST in respect of legal services, sponsorship services, etc. received by an SEZ unit in IFSC, Gandhinagar, from a unit in DTA, which are chargeable to GST under RCM, Tax Research Unit, CBIC, New Delhi, clarified as under:

"3. Since the intention of the Legislature is not to tax supplies to a unit in SEZ or a SEZ developer that have been zero-rated under clause (b) of Section 16(1) of the IGST Act, by virtue of deeming provision under Section 5(3) of the IGST Act, 2017, the levy for procurement of input services specified under Notification No. 13/2017-CT (Rate) falls upon the unit in SEZ or the SEZ developer. It is therefore clarified that a unit in SEZ or the SEZ developer can procure such services, where they are required to pay GST under reverse charge without payment of integrated tax, provided the actual recipient, i.e., the unit in SEZ or SEZ developer, furnishes a Letter of Undertaking in place of a bond as specified in condition no. (i) in para 1 of notification No. 37/2017-CT. The actual recipient of service is the deemed supplier or registered person for the purpose of fulfilling other conditions in Paragraph 1 of the notification, including the manner of furnishing the Letter of Undertaking."

Similar views are ruled in many rulings, and a few such rulings are M/s. Portescap India Private Limited [5], M/s. Abans Alternative Fund Manager LLP [6], and M/s. Waaree Energies Limited [7].

From above, it is imperative that an SEZ unit or developer procure sponsorship services (or any other services liable under RCM) without paying GST under RCM by furnishing a LUT or bond.

Challenges and future outlook

The GST framework for sponsorship services necessitates a nuanced understanding to navigate compliance effectively. Addressing challenges such as ITC reversals and ensuring proper contract documentation are vital for minimizing tax risks and optimizing financial outcomes.

Conclusion

In conclusion, comprehending the nuances of GST on sponsorship services is imperative for both sponsors and recipients. By staying informed and adhering to regulatory guidelines, businesses can strategically leverage sponsorships while meeting their GST obligations. As GST evolves, continued awareness and adaptation will be key to maintaining compliance and maximizing the benefits of sponsorship engagements.

Disclaimer: The views expressed are strictly personal and based on the position of the law prevailing as of date. This cannot be regarded as an opinion.

The author can also be reached at t.ashalatha2001@gmail.com.

• [1] 2022 (5) TMI 962
• [2] RAJ/AAR/2019-20/07
• [3] Section 2(47) reads with Section 17(3).
• [4] Manner of determination on ITC in respect of capital goods and reversal thereof in certain cases.
• [5] 2023 (1) TMI 1092-AAAR, Maharashtra
• [6] 2024 (4) TMI 844, AAR, Gujarat
• [7] 2024 (4) TMI 845, AAR, Gujarat