In a significant development that provides clarity to businesses engaging in promotional schemes for expansion, the Karnataka Authority for Advance Ruling (AAR) has issued a ruling regarding the eligibility of input tax credit (ITC) for performance-based promotional schemes.
The ruling distinguishes goods provided free of charge to distributors or retailers upon meeting specific sales purchase targets from conventional gifts. It states that such goods remain eligible for input tax credit under the Goods and Services Tax (GST) framework. However, it is important to note that these giveaways are classified as ‘supply’ under GST regulations and are subject to taxation, even when transferred without any monetary consideration.
This dual nature of promotional item treatment, where ITC can be claimed but GST must be paid upon their transfer, highlights the need for further clarification in light of previous conflicting rulings, as mentioned by Ajinkya G. Mishra, a partner at S&R Associates.
The case under consideration revolved around a promotional initiative by Orient Cement Ltd., which rewarded its distributors with gold coins or other goods based on their purchase volumes over a specified period. The central issue was whether ITC should be allowed for these items distributed at no cost or if they should be considered as gifts, thus blocking ITC under existing tax laws.
According to GST laws, ITC is claimable only for goods used in the course of business operations, with an exception for goods distributed as free samples or gifts.
Orient Cement argued that ITC should be permitted for these items since they were an integral part of the company’s marketing strategy and directly contributed to business advancement. Furthermore, Orient contended that these items should not be labeled as gifts, as they were distributed under specific contractual conditions. As gifts cannot have conditions attached, these items should not be categorized as such, the company asserted.
The AAR recognized the merit in Orient’s argument and allowed the company to claim ITC. The ruling clarified that Orient issued these gold coins and white goods as incentives based on a contractual agreement with recipients, which included specific conditions and stipulations. Since a gift, by definition, lacks such conditions or stipulations, these items do not fall within the category of gifts.
This ruling offers a favorable outcome for businesses seeking to claim ITC for goods used in promotional activities. However, given the existence of opposing rulings that deny ITC for promotional items, Abhishek Jain, a partner and the national head of indirect tax at KPMG India, called for further clarification from the GST department on this matter.
Notably, previous cases involving Biostadt India Ltd. and Moksh Agarbatti Co. have resulted in the denial of ITC for goods distributed through promotional schemes.
Niraj Bagri, a partner at Dhruva Advisors, shares a similar perspective, emphasizing that promotional items should be viewed within the context of sales promotion schemes. Consequently, any expenses incurred have already been factored into the cost of goods supplied and have already borne GST. Thus, these expenses should qualify for ITC as they are akin to marketing campaign costs.
However, it’s worth noting that the ruling also deems such distributions, even without a financial exchange, as falling under the scope of supply as per GST laws, making them subject to taxation. Rahul Dhanuka, a partner at Khaitan and Co., expressed reservations about this aspect of the ruling, arguing that it may lead to disputes, particularly if the interpretation is expanded to include any goods with ITC that are disposed of without consideration.
Gunjan Prabhakaran, a partner at BDO, concurs with this perspective, contending that items like gold coins and white goods should be considered part of the original supply. Since GST has already been paid on the entire value of the original supply, imposing additional GST on the value of such items provided later as part of a sales promotion scheme appears contradictory to the department’s own circular on the matter.