GST: Promotional Schemes Are Not Gifts, Tax Credit Can Be Claimed, Says Karnataka AAR

In relief for businesses adopting newer promotional schemes to expand their businesses, the Karnataka Authority for Advance Ruling has allowed input tax credit benefits for performance-based promotional schemes.

Goods that are given away free of charge to distributors or retailers upon fulfilling certain sales purchase targets would not fall under the scope of gifts and therefore would be eligible for input tax credit, according to the ruling. These giveaways would, however, be considered 'supply' under the GST laws and therefore would be subject to tax even if transferred without consideration, the court said.

Therefore, while on the one hand, businesses can claim ITC for promotional items, on the other hand, they would also be required to pay GST on the transfer of incentive or promotional items, even if they were transferred for free, said Ajinkya G. Mishra, a partner at S&R Associates. This is relevant in light of various contrary rulings, he said.

The current case involved a promotional scheme run by Orient Cement Ltd. As part of its marketing activities, it introduced a promotional scheme for its distributors under which dealers and distributors were given gold coins or other white goods based on the quantity of goods purchased over a period of time. The question was whether ITC should be allowed on such goods, which are given away to distributors free of charge, or does it fall under the scope of gifts for which ITC is explicitly blocked under the laws?

Under the present GST laws, one can claim ITC on only goods that are used in furtherance of business. However, they are not available for goods distributed in the form of free samples or gifts.

According to Orient, ITC should be allowed for such goods as they were used as part of the company's marketing objectives and are therefore in furtherance of business. Moreover, these goods, according to the company, cannot be classified as gifts as they were given subject to certain contractual obligations. As gifts cannot be conditional, these goods cannot be classified as such, the company argued.

The court, while finding merit in Orient's agreement, allowed it to claim ITC. According to the court, the applicant (Orient) "is issuing these gold coins and white goods so procured as incentives as per the agreement reached between them and the recipients. It is only issued subject to the fulfillment of certain conditions and stipulations. A gift is something that is given without any conditions or stipulations, and hence, the same cannot be covered under the scope of a gift," the court said.

This is a positive development as it would enable businesses to claim ITC for goods availed for promotional purposes, said Abhishek Jain, a partner and the national head of indirect tax at KPMG India. However, considering the fact that there are contrary rulings that deny ITC on promotional items, the GST department should issue some clarification on the issue, he said.

Courts have previously denied ITC in the cases of Biostadt India Ltd. and Moksh Agarbatti Co. for goods distributed under a promotional scheme.

Niraj Bagri,a partner at Dhruva Advisors, also holds a similar opinion. According to him, promotional items ought to be viewed in the context of a scheme that seeks to promote sales. Therefore, any expense incurred has already been factored into the supply of goods and has already suffered GST. Thus, it is like an expense that has been incurred as part of a marketing campaign and should be eligible for ITC.

The order, however, is not all good news for businesses. The court has also held that such distributions, even though done without consideration, fall within the ambit of supply under the GST laws and therefore would be taxable. This order, therefore, should be taken with a pinch of salt, says Rahul Dhanuka, a partner at Khaitan and Co.

According to him, the court was not right in treating such distribution as supply. Further, according to him, in the event that the interpretation is further advanced, the same would mean that any goods on which ITC has been taken and which are disposed of without consideration would be construed as a supply. This would lead to further disputes, he added.

Gunjan Prabhakaran, a partner at BDO, concurs. According to her, these goods (gold coins and white goods) should be seen as part of the original supply for which they were given. Since GST has already been paid on the entire value of the original supply, the additional GST levy on the value of such goods provided later under the sales promotion scheme does not appear to be correct and also seems to be in contradiction with the department's own circular in this regard.