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Introduced to simplify India’s tax regime, the Goods and Services Tax (GST) promised a seamless flow of Input Tax Credit (ITC) to enhance efficiency and reduce the tax burden on businesses. However, India Inc. has been vocal about various challenges, seeking clarity and consistency in the GST provisions, particularly related to ITC.
The recent GST Council meeting unveiled substantial proposals from Finance Minister Nirmala Sitharaman but industry stakeholders are anticipating additional measures. While any new GST amendment necessitates deliberation within the GST Council, the minister could highlight key priorities in her forthcoming Budget speech.
In this context, the industry has heightened expectations from the Union Budget to provide clarity on uncertainties surrounding ITC. Businesses are calling for comprehensive reforms to simplify ITC claims, alleviate compliance burdens, and improve transparency within the GST framework, essential for promoting a conducive business environment and bolstering economic growth.
This article delves into the expectations of Indian businesses and addresses concerns regarding the eligibility of ITC, particularly focusing on the denial of ITC on sales promotion expenses.
Sales promotion activities are vital for businesses aiming to attract customers, boost sales and enhance brand visibility. These activities can range from offering discounts (quantity discounts, cash discounts etc.), gifts and free samples to conducting loyalty programmes and providing promotional merchandise. The deployment of promotional schemes is vital in today’s fiercely competitive landscape.
In industry practice, promotional schemes fall into two main categories: target-based schemes and those schemes where promotional items are given for free as a marketing tactic. While promotional activities are crucial for business growth and market presence, GST provisions impose specific restrictions on the eligibility of ITC for goods given by way of gifts or free samples for promotional purposes.
Due to ambiguity surrounding the meaning of ‘gift’, authorities have been consistently denying such ITC. Notably, as per a Central Board of Indirect Taxes and Customs (CBIC) press release dated July 10, 2017, ‘gift’ has not been defined in the GST law. In common parlance, ‘gift’ is made without consideration, is voluntary in nature, and is made occasionally.
The Board, in its wisdom, issued Circular No. 92/11/2019-GST dated March 7, 2019, dealing with ITC on sales promotion expenses. In this circular, it has been clarified that ITC shall not be available for goods and services used for gifts or free samples distributed without consideration. If the distribution of gifts or free samples qualifies as a “supply” under Schedule I of the Act, the supplier can avail ITC.
The issue surrounding the GST implications of promotional schemes, both from an outward and inward perspective, has been a long-standing source of debate and confusion, with various conflicting rulings and interpretations. For instance, the Tamil Nadu Appellate Authority for Advance Ruling (AAAR) ruled in the matter of GRB Dairy Foods Pvt Ltd. that goods distributed as part of a promotional scheme would not qualify as a supply and as a result, the ITC would not be eligible. This viewpoint was also upheld by the Karnataka AAAR in the case of Page Industries.
To contend that companies distribute goods to their dealers and customers purely on a voluntary basis, devoid of any business objective, happens to be unreasonable. The notion that such distributions lack a strategic business purpose is unfounded.
It is crucial to recognise the embedded nature of these promotions within the overall supply value. While they may appear as ‘gifts’ from a marketing perspective, they are far from gratuitous in a commercial sense. The industry sets its sales targets and incorporates these offers into the value of supply on which taxes are duly paid, aligning with the principle that ‘nothing is free’ and the entire arrangement operates on a quid-pro-quo basis.
However, revenue authorities often dispute this, seeking to tax these supplies or insist on reversing ITC.
Addressing the concerns of India Inc. regarding ITC eligibility on sales promotion expenses is crucial for fostering a business-friendly environment under the GST regime. Achieving clarity and consistency in GST provisions, particularly those related to ITC on promotional expenses, remains pivotal. As businesses await the upcoming Union Budget, their hopes are pinned on comprehensive reforms that streamline ITC claims, reduce compliance burdens, and enhance transparency.
This article first appeared in The Indian Express on 17 July 2024.
