Diwali Gifts to Employees: A Complete Tax Analysis from GST Perspective

The festive season of Diwali, which we all celebrated with great joy in October, is a time of bonuses, goodwill, and, of course, corporate gifts. As companies show appreciation for their employees’ hard work with gifts, vouchers, and bonuses, a critical question arises for their finance teams and tax consultants: What are the GST implications?

This article provides a comprehensive analysis of both the Special GST aspects to be considered for the Return of October 2025 (To be filed in November 2025).

Analysis under Goods and Services Tax (GST)

The primary question for any business is the eligibility of Input Tax Credit (ITC) on gifts procured for employees.

The Legal Hurdle: Section 17(5)

The eligibility of ITC is fundamentally blocked by Section 17(5) of the CGST Act, 2017. This section provides a list of “blocked credits,” which cannot be claimed even if they are used in the course of or for the furtherance of business.

Specifically, Section 17(5)(b)(i) states that ITC shall not be available for:

“goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;”

The word “gift” is the key. A gift is generally understood as a transfer made voluntarily and without consideration. Since employee gifts are typically not part of a contractual obligation (unlike a bonus), they fall under this definition, and the ITC on their purchase is blocked.

The ₹50,000 Conundrum (Schedule I)

This is where most confusion arises. Many professionals refer to the ₹50,000 limit, but it’s often quoted in the wrong context. This limit does not determine ITC eligibility; it determines whether the transaction is a “supply” or not.

• The Law: As per Schedule I (Entry 2) of the CGST Act, a supply of goods or services between “related persons” (an employer and employee are related persons) without consideration is treated as a supply.
• The Proviso: However, the proviso to this entry states that:
  

  “gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.”

Let’s decode this:

1. Gift Value ≤ ₹50,000: The transaction is NOT a supply. The employer does not have to pay any output GST on it. However, since it is explicitly termed a “gift,” the ITC remains blocked by Section 17(5).
2. Gift Value > ₹50,000: The transaction IS treated as a supply. The employer must pay output GST on the value of the gift. Since the employer is paying output tax, they are eligible to claim the ITC on the original purchase.

CBIC’s Clarification:

A CBIC Press Release dated 10th July 2017 clarified this matter. It stated that ITC will not be available on goods disposed of as “gifts.” For goods given as part of an employment contract (perquisites), ITC would be available. However, gifts given on festive occasions are generally not part of the contract, and the safest, most compliant position is to treat them as “gifts” and forgo the ITC.

GST Conclusion:

For 99% of Diwali gifts (sweet boxes, vouchers, household items) that are below the ₹50,000 per-employee threshold, the employer cannot claim ITC.

Conclusion: A Final Word of Advice

For businesses, the post-Diwali accounting is clear. While the gesture of gifting builds invaluable goodwill, the tax compliance must be precise. The simplest and most compliant approach for all gifts under ₹50,000 is to not claim ITC.

Disclaimer: The views expressed in this article are for informational purposes only and do not constitute legal or tax advice. Readers are advised to consult their tax professional for specific guidance on their particular situation.