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GST and Input Tax Credit on Promotional Products

Rajdeep Saini

| Updated: Nov 19, 2020 | Category: GST, Income Tax

Input Tax Credit

Nowadays, businesses are aggressively involving in the promotional methodologies to further accelerate the sales of their product and it is also witnessed that these sales activities increase the amount of customers for their products and increase their sales volume. These methods include discounts, allocation of warranty, the involvement of free samples, and stipulation of the extra quantity of the products. These activities are also necessary due to the cut-throat competition in the market; it becomes significantly important to understand the GST implication as well as the input tax credit on the promotional products.

The chargeability of the tax on the aforesaid promotional scheme requires to be assessed in accordance with Schedule 1 of the CGST Act 2017[1]. Moreover, the consequence of tax in regard to these promotional schemes needs analysis in regard to the restriction imposed on the availment of an input tax credit.

GST and input tax credit implications on Free Samples

The practice of providing free samples is generally followed for the purpose of penetrating newer products in the market.  The samples are usually dispensed without any consideration of the unrelated person.  It is important to note that the only supplies without any consideration to the related person are covered under Schedule 1 of the act. Hence, any distribution to the unrelated individual shall not come under the definition of supply as per the CGST Act. Hence, GST shall not be necessary to be paid on the distribution activity.

However, the Input Tax Credit of the goods which is distributed in free must be prohibited in accordance with Section 17(5) of the Act.

GST and input tax credit implications on Extra Units / Quantity of the Same Product

The condition on an extra unit/ quantity of the similar or same product is an effective marketing strategy. This practice is majorly used by retail shopping outlets and FMCG companies. For instance, buy 1 get 1 offer, 50% extra quantity in oil bottles or shampoo bottles. In these cases, the cost of the extra quantity and extra unit of the bottle is already included in the sales price of that first unit the customer is already paying for it. These schemes are introduced for the buyer, to provide them an incentive to buy more quantity at a lower price by indirectly giving them something free.

The value or the discount on the free article is not included in the value of supply just to compute the liability of GST. Hence, there will be no GST charged on the extra unit or the extra quantity offered as the promotional tools

Furthermore, no credit reversal is required with respect to the extra unit/quantity of that is offered in free.

GST and Input Tax Credit implications for providing Free Gifts to distributors

Many companies also provide gifts free of cost to the distributors fulfilling certain targets in the form of incentives to the distributor. These goods may be procured from outside or may be manufactured by the company itself. The tax implication in this view required to be examined under Schedule I which is ‘Disposal of business or permanent transfer of assets where input tax credit has been availed on such assets.’

In the case where the input tax credit is availed on any gifts or distributed goods, that particular transaction shall be covered under the ambit of supply and tax shall be charged. However, Section 17(5) doesn’t allow the availment of the Input Tax Credit in case of gifts and distributed goods. Hence the Input Tax Credit shall not be on such goods being provided to the distributors.

GST implications and Input Tax Credit on Cash back coupons

Cash back coupons are the most popular form of the marketing strategy adopted nowadays.

The following are the cash back scheme used by the vendor:

  • Cash back coupons in the product packaging:

Under this scheme, the products which is been supplied to the customer include the cash back coupons. It helps the customers to further reduce the cost of the products. As per section 15, with respect to the discounts offered at the time of the supply of goods, only such discounts will be reduced from the taxable value which has been recorded in the bill. The cash back amount shall never be mention in the invoice. Hence, the cash back showcased as a marketing expense shall have no impact on reducing the GST.

  • Cash back coupons provided by a person other than the supplier

Companies like Paytm and Amazon offer many cash backs to their customers. These cash backs are not provided to them by the seller and the expenditure is borne by the e-commerce operators. In this case, customers pay the entire amount and the cash back can be used in the next purchase, hence it cannot be recorded in the invoice of the supplier. Such cash backs will have no effect on reducing the GST liability.

GST and Input tax credit implication on Free Articles

Under this scheme, a free article is provided with the purchase of the main product for instance, a laptop bag is provided with the purchase of the laptop. In this case, the price of the laptop bag is already included in the price of the laptop. For the purpose of computing the GST, the value of a free article will not be included in the laptop. Hence, no GST is necessary to be paid on the free article. Moreover, there is no requirement to reverse the Input Tax Credit in this regard.

Conclusion


It is evident from the above discussion that there is a different promotional schemes having different tax and input tax implications. In this regard, it is crucial for businesses to examine and arrive at the true cost of the promotional tools used by the supplier and must avoid future litigation problems.

Read our article:Complete Synopsis on GST Refund of Unutilised Input Tax Credit

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Rajdeep Saini

Rajdeep is a law graduate from Guru Gobind Singh Indraprastha University. During his law school he gained vast experience in corporate and commercial law. He likes traveling and performing stand-up comedy.

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