GST

Impact of GST on Sales Promotion Schemes in India

Recently, the Central Board of Indirect Taxes and Customs (CBIC^[1]) issued circular clarifying various issues relating to the treatment of sales promotion schemes. The government has clarified that promotional scheme such as ‘buy one get one free’ (BOGO) and additional quantity for the same price will be eligible for the input tax credit. Hence, this will ultimately bring massive relief to the fast moving consumer goods (FMCG), food, retail and pharmaceutical companies.

Purpose of Introducing New Rules for Sales Promotion Schemes

Generally, promotional schemes given on sale are to attract the customer base or market. Basically, it is a marketing strategy. It includes different type of discount, incentives on buying, giving vouchers, etc. Nowadays, businesses use various promotional tools to increase the sale of their products.  Companies will also not have to pay goods and services tax (GST) separately on the additional product unless it is a different one facing a higher rate of tax.

Sales Promotion Schemes Examined by the GST Council

The GST council has framed new policies on the following types of sales promotion schemes:

• Free samples & gifts
• Buy one get one free offer
• Buy more, save more discount offers
• Secondary Discounts

Now let’s try to understand them in detail:

Read our article:The Highlight of 29th GST Council Meeting

1. Rules for “Free Samples and Gifts”

Goods or services or both which are supplied free of cost will not be treated as supply (except in the case of activities mentioned in Schedule I of the Central Goods and Services Tax [CGST] Act, 2017). However, input tax credit (ITC) will not be available on the inputs, input services or capital goods to the extent used concerning such gifts or free samples, except in cases where such gifts or free samples are treated as a [deemed] supply under Schedule I of the CGST Act.

  2.  “Buy one, get one free” offers

• Many times, companies announce offers like “Buy one get one free” to attract the customers. Offers like “buy one soap and get one soap free” or “get one toothbrush free with the purchase of toothpaste.” The goods and services which are supplied free of cost shall not be treated as “supply” under GST. There is no individual supply of free goods but is a case of two or more individual supplies with a single price being charge for the entire quantity. It can at best be treated as supplying two goods for the price of one.
• The taxability of such a supply would depend on whether it is a composite supply or a mixed supply as defined in CGST Act.

• The supplier would be eligible to claim ITC on inputs, input services and capital goods used about the supply of goods or services or both as part of such offers.

3.  Discounts including ‘Buy more, save more’ offers

• Buy more save more:

In the case of ‘buy more save more’ discount depends on the volume. For example, a 10% discount is provided on the purchase of INR 5000, and above and a 20% discount is offered on the purchase of INR 10,000 and above.

Such discounts are shown on the invoice itself. Please note that such discount offered shall be excluded to determine the value of supply (provided it satisfies the factors laid down in section 15 (3) of the Central Goods and Service Tax Act, 2017.

• Periodic or year ending discounts, i.e. Post Discounts:

Some suppliers also offer regular / year ending discounts to their stockists like an additional discount of 1% if you purchase 10000 pieces in a year, get an additional discount of 2% if you are buying 15000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been affected and generally at the year-end. In commercial parlance, such discounts are formally referred to as “volume discounts.”Such discounts are passed on by the supplier through credit notes.

Such discount offered shall be excluded to determine the value of supply (provided it satisfies the factors laid down in section 15 (3) of the Central Goods and Service Tax Act, 2017.

4. Secondary Discounts

In the case of secondary market schemes, where discounts are announced after the original supply, the supplier can issue commercial credit notes. But, such discounts would not be eligible for any deduction from the value of the supply under section 15(3)(b) of the CGST Act, as it was not known at or before the time of supply. Further, there would not be any impact on the ITC in the hands of the supplier.

Viewpoints of Experts on this Circular

Read the viewpoints of various tax experts on this circular

Source: The Economic Times

Takeaway

This seems to be a welcome move, as there were multiple views established on the GST implications of sales promotional schemes. Further, it will provide clarity to several sectors. A lot of certainties would develop in the GST treatment of sales promotion schemes. There have also been reports of tax authorities launching investigations on various assessees on such schemes, and this circular will put all such disputes to rest while giving clarity to the industry on how to devise sales promotion schemes in the future.

For any additional information, you can reach to our team of experts or write to us at info@enterslice.com.

Further, you can read the complete notification.

circular-cgst-92

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