‘Corporate Gifts – Beware of Tax Implications’

Mr. K.H.Viswanathan – Executive Director, RSM Astute Consulting Group

Gifts! Corporate Gifts have over the years proved to be an effective marketing tool for organizations across products and services. Organizations understand the importance of building and maintaining long term relationships with clients, prospective clients, business associates, employees and other agencies involved in the growth of the organization. However, corporate gifting should be used very judiciously as they can sometimes back fire.

Cultural diversities are great enablers of gifting etiquettes. In India, the occasion of Diwali is one of the auspicious events to express gratitude towards people for contributing to the growth of the individual/organization. Diwali is one of the widely celebrated festivals in India.

Companies generally give certain gifts to its customers, business associates and employees. Tax treatment in the hands of recipient of the gift differs depending upon the relationship it has with the Company. Here is the overall view of tax treatment in the hands of giver of the gift (i.e. Company) and the recipient of the gift (i.e. customer, business associates and employees)

In the hands of Company (Giver)

In case of gifts to customers / business associates, the Company generally claims such expenditure as business promotion expenses eligible for deduction against its income and in the case of employees, generally, the Company claims the same it as employee welfare expenses. Further, the said expenditure should be justifiable and reasonable considering the size and operations of the Company.

CBDT has issued a circular stating that any expense incurred in providing freebies to medical practitioners by pharmaceutical companies in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the IT Act, being an expense prohibited by the law. The sum equivalent to value of freebies enjoyed by the medical practitioner shall be taxable as business income or income from other sources depending on the facts of the case.

In the hands of Receiver of the Gifts

When the recipient is a customer 

It is commonly seen that Company introduces many innovative ways to award customers like giving gift who buys products of a certain value or category.

Under the provisions of section 56(2)(vii) of the Income Tax Act, 1961, any sum of money or any property in kind which is received without consideration (in excess of the prescribed limit of Rs. 50,000) than the aggregate of such amount or value of property received by an individual is chargeable to income-tax in the hands of recipient under the head ‘income from other sources’. Even if the property is received by paying some consideration but if such consideration is less than the fair value(for movable property)/stamp duty value (for immovable property) by an amount exceeding Rs 50000. Than the aggregate of such difference shall be taxable as income from other source.

However wef A.y 2019-20, the above provision relating to immovable property has been amended which is as follows: 

For a consideration , the stamp duty value of which exceeds 105 percent of the consideration and the difference between stamp duty and consideration exceeds Rs 50000, than the difference amount between stamp duty and consideration shall be taxable as income from other source.

property for this purpose means the following capital assets of the assessee i.e. recipient : immovable property being land or building or both, shares and securities, jewellery, Archaeological collection, drawings , painting, sculpture, any art of work or bullion.

For Detailed Analysis please read our article: Taxation of Gift-Under Income Tax Act.

When the recipient is a dealer/business associate

The Companies promote the sale of its products / services through various promotional schemes such as giving incentives by way of gifts /vacation trips to dealers/business associates for achieving certain specified targets. The incentive so received from the Company may be taxable in the hands of such dealers/business associates as business income.

When the recipient is an employee

It is customary in India to give gifts directly or indirectly in the form of vouchers or tokens to employees on social and religious occasions like Diwali, Christmas, New Year, anniversary of the organization, marriages, etc. Such gifts up to Rs. 5,000 in the aggregate per financial year would be tax exempt in the hands of the employees. The excess value of gift over and above Rs. 5000/- would be taxed as a perquisite in the hands of the employees.

It is advisable to maintain documentary evidence in respect of the gifts received, so that any dispute with tax authorities can be avoided during the assessment process.

Enjoy your gifts, but with a pinch of carefulness!

(Republished With Amendments)

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