Complete guide on GST on Free Gifts & Promotional Items

Introduction

Distribution of gifts and other items for the purpose of sales promotion has been quite usual in the trade & business over the years and especially in the case of industries like pharma, FMCG etc. In the pre-GST era, there was not much buzz over taxability of gift & promotional activities but implementation of GST has opened plethora of confusions one of which is GST on gift & sales promotional activities by the companies.

The companies used to provide gifts to their dealers, employees etc. in the course of business and to further its business. Such gifts may be festival gifts like on Diwali, free tours on achieving sales target. Further, the companies used to promote their sales by offering various schemes to their customers like “Buy one get one”, special discount on bulk purchase, discount vouchers. So, it becomes important to discuss GST implications on such transactions. Before moving ahead, it is important to understand what the ‘Gift’ is?

What is ‘Gift’

The term ‘Gift’ has nowhere been defined under GST law. So, we will look into the definition of ‘Gift’ in Gift Tax Act which states that “Gift is a transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth.”  Thus, ‘Gift’ is a gratuitous act which does not require a consideration. Though, love, affection, spiritual benefit etc. may be the factors behind such gift but these factors cannot be called to be legal considerations. Further, there should not be any contractual obligation behind such gift.

In every tax law, ‘Taxable Event’ is very important to arise the chargeability of tax. So, before making further discussion, we should also understand the “Taxable Event” under GST.

What is ‘Taxable Event’ in GST

‘Taxable Event’ under GST is supply of goods or services. Section 7(1) of CGST Act states that ‘Supply’ includes: -
All forms of supply of goods or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Thus, there are 2 important factors to determine the taxable event: -

• Firstly, there should be a supply of goods or services for a consideration and
• Secondly, such supply should be in the course or furtherance of business

On a combined reading of definition of ‘Gift’ and ‘Taxable Event’, it becomes apparently clear that ‘Gift’ does not fall under the definition of Supply as the element of consideration is missing even though such gifts might have been in the course or furtherance of business. Further, Schedule-I to CGST Act, 2017 specifies certain activities which shall be treated as ‘Supply’ even where there is no consideration.

ITC restrictions in case of gifts or free samples

Section 16(1) of the CGST Act states that every registered person is entitled to take input tax credit (ITC) on any inward supply of goods or services which are used by him in the course or in furtherance of his business. However, section 17(5) of the CGST Act blocks such credit of ITC in certain cases.
In this respect, clause (h) of section 17(5) states that no ITC could be availed in respect of goods lost, destroyed, written off or disposed off by way of gifts or free samples. Thus, it is to be kept in mind that no ITC shall be available in respect of gifts or free samples despite the fact that such goods are so distributed as gift or sample in the course or in furtherance of business.

To bring more clarity, CBIC brought Circular No. 92/11/2019-GST to clarify doubts revolving around gifts and free promotional schemes. This circular cover various aspects of GST implications in respect of free gifts and various promotional schemes. In coming paras, we will discuss instances covered by Circular No. 92/11/2019-GST as below along with judicial pronouncements: -

Whether GST applicable on free gifts or free samples

It is a common practice among trade and industry such as pharma companies which often provide drug samples to their stockists, dealers, medical practitioners etc. without charging any consideration. Samples which are supplied free of cost, without any consideration do not qualify as supply. So, ITC shall be blocked in this case in terms of section 17(5) of the Act. But where free gifts or samples fall in Entry-2 of Schedule-I to CGST Act, 2017 i.e. activities between related or distinct persons, it shall be treated as a supply and therefore ITC shall be available.  

On this matter, various Advance Ruling Authorities have given their rulings which are given here below for better understanding of the issue: -

Surfa Coats (India) Pvt. Ltd. AAR Karnataka

The applicant frames incentive schemes depending on market conditions to motivate dealers to lift their products. The schemes are named as Painters Schemes, Dealers Incentive Schemes, Gold Schemes, Foreign and Local Trip Schemes etc. The incentives are given subject to fulfilment of terms laid down in each such scheme. Incentives under the schemes under mostly given in kind such as TVs, refrigerators, Washing Machines, Mixers, Grinders, Watches, Gold Coins etc. for distribution to painters and dealers. The applicant purchases the above goods for free distribution as incentives. The applicant sought ruling in respect of GST implication in such incentives.

The AR authority observed that in terms of section 17(5)(h) of CGST Act, 2017, ITC is not admissible on any goods disposed by way of gift or free samples, whether or not in the course or furtherance of business. Therefore, the applicant is not entitled to avail ITC on such items. Further, free foreign trips provided as incentives to dealers shall also not qualify as “Supply” in terms of section 7(a)(1) of the CGST Act and Schedule-I to CGST Act. Therefore, the ITC on the input services procured for offering services of free trips, is not available to the applicant.

Biostadt India Limited GST-ARA-72/2018-19/B-165 Mumbai dated 20.12.2018

The applicant distributes gold coins to their customers under sales promotion scheme. The applicant claims that they have entered into a contractual arrangement with their customers where they have to achieve a certain sales target to get gold coins. As such, the distribution of gold coin cannot be treated as “Gift” because “Gift” is a gratuitous or voluntary act without intention of getting any consideration.
 

However, the Advance Ruling Authority observed that there is no contractual arrangement in such scheme. A contractual arrangement implies that it should also be agreed by the customer in writing to such scheme floated by the applicant. We find that gold coins are not given to the customers under any contractual obligation but voluntarily on certain conditions achieved by their customers. Therefore, distribution of gold coins by applicant is nothing but gifts. Hence, the transaction is covered by the provisions of Section 17(5) of the Act. Thus, ITC shall be blocked in respect of such gold coins.

Page Industries Limited Advance Ruling No. KAR ADRA 54/2020

The applicant distributes the various products namely display items, display boards, uniforms for sales personnel, posters, gifts for brand operators, retailers, staff and customers of outlets, outdoor hoardings, carry bags etc. These items are distributed free of cost to distributors, franchisees and also brand outlets of the applicant. The applicant sought ruling in respect of this transaction.

The Advance Ruling Authority stated that Distributors and franchisees acts as sole agent of the company as such they fall in the definition of related persons under GST. As such, any supply of goods ‘free of cost’ to distributors and franchisee shall be deemed as “Supply” in terms of Schedule-I of CGST Act and thus GST shall be payable on such deemed supply even if there is no consideration and ITC shall be admissible thereon. However, any such supply of freebies to retailers, brand outlets or customers shall be treated as ‘gift’ and as such ITC shall be blocked as per the provisions of section 17(5) of the CGST Act.

Sanofi India Limited 103 Taxmann.com 127 (AAR- Maharashtra)

ITC is not available on GST paid on expenses incurred towards promotional schemes (like foreign trip or gifts for achieving targeted sales) and goods given as brand reminders, as promotional products are not given to customers under any contractual obligation and are voluntarily given on certain conditions achieved by customers. Therefore, ITC shall be blocked as per the provisions of section 17(5) of the CGST Act.

GST implications on “Buy one get one free offer”

Sometimes, companies announce offers like ‘Buy one, Get one Free’. For example, buy one soap and get one soap free or get one tooth brush free along with purchase of tooth paste. It may appear at first glance that such offers are supply of items free of cost without any consideration. In fact, it is not an individual supply of free goods but a case of two or more supplies where a single price is charged for the entire supply. It can be treated as supplying two goods for the price of one. Such supplies shall be taxable as composite supply or mixed supply and the as per the tax rate as per section 8 of the Act. It is also clarified by the CBIC that ITC shall be available to the supplier for the inputs used in relation to supply of goods or services as part of such offers.

Conclusion: Free gifts or free samples to any unrelated person shall not be treated as “Supply” under GST. Therefore, ITC in respect of inputs utilized for making such free supply shall be blocked under the provisions of section 17(5) of the CGST Act. But where gifts or samples are given to related or distinct persons without any consideration, such gifts or samples are deemed as “Supply” owing to Schedule-I to CGST Act, 2017. Therefore, GST shall be payable on supply of such free gifts or samples to related persons and ITC shall be admissible in terms of section 16(1) of the CGST Act.