1. Person in Trade and Industries are in the fix regarding availability of Input Tax Credit (ITC) on certain type of Business promotion expenditure. Such expenditures are necessary to boost the sale of service. and before we proceed further let us look into certain sections/clauses/terms and conditions.

2. Relevant Provision :

  • Section 17(5)(h)…. Notwithstanding anything contained in subsection (1)  of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
  • Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
  • Scope of Schedule I (Para 1)  of the CGST Act, 2017Section 7(1)(c) states that the activities specified in schedule I made or agreed to be made without a consideration shall be treated as a supply and Entry No. 1 paara of schedule I states that “Permanent transfer or disposal of business asset where ITC has been availed on such asset”

The Term ‘business asset’ has not been define  under the Act, According to general rule of interpretation, if the language used has a natural meaning we cannot depart from the meaning unless, reading the statue as a whole, the context directs us to do so.According to plain meaning rule, absent a contrary definition  within the statute, words must given their plain, ordinary and literal meaning.

The term ‘ business asset’ is defined in general term as a piece of property or general purchased exclusively for the business use. There are many different categories of assets, including current and non-current, short term and long term, operating and capitalized, and tangible intangible.

  • Scope of Schedule I (Para 2) of the CGST Act, 2017; In para 2 of schedule 1, it is stated that ‘Supply of goods and services or both between related persons or between related  persons or between distinct person as specified in section 25, when made in the course of furtherance of business without consideration treated as a supply’,

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

Gift – The term ‘Gift ‘ has not been defined in the Act, However, we find definition of gift in ‘Gift Tax Act, 1858’ as follows:

“Gift means the transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in monry or moneys worth..

Characteristics of a Gift;

1. There must be voluntary transfer,

2. Not as result of contractual obligation,

3. BY one person to another,

4. of any movable or immovable property,

Supply- As per of sub-section (1) 7 of the said Act, for the purpose of this Act, the expression ‘supply’ includes-

1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

2. imports of services for a consideration whether or not in the course or furtherance of business;

3. the activities specified in schedule 1, made or agreed to be made without consideration; and

4. Sec. 7(1A) the activities to be treated as supply of goods or supply of services as referred to in schedule II.

After having clarity about the term ‘Gift’ we further proceed issued with respect  to certain type of discounts:

(A) Free sample and gifts: Sample which are supplied free of cost, without consideration, do not qualify as ‘supply’  under GST,(except where the activity falls within the ambit of schedule I of the said Act). Further as per section 17(5)(h) of the CGST Act, 2017, IRC shall not be available  in respect of goods lost, stolen, destroyed, written off or disposed of by way gift or free sample.

CBIC FAQs:

Q 1. What are the requirement for clearance of physician samples distributed free of cost?

Ans: In case of clearance of physician samples distributed free of cost, the ITC availed on the said sample has to be reversed in view of the Provision under section 17(5)(h) of the CGST Act, 2017. No tax is payable on clearance of physician samples distributed free of cost as the value of supply in zero and no credit has been availed.

(B) Buy one get one free offer: it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can best be treated as supplying two goods for the price of one, Taxability  of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provision of section 8 of the said Act. ITC shall be available to the supplier for the inputs, input service and capital goods used i realtion to supply of goods or services or both as part of such offers.

CBIC’s FAQs:

Q 2. How the Invoicing should be done for free goods given along with sale so that corresponding input tax credit is not required to be reversed  for the products under scheme?

Ans: Invoice value would include value of all goods  includeng those supplied free. In such cases, ITC is not to be reversed.

(C) Discount including ‘Buy more , save more’ offer: Sometimes the supplier offers staggered discount to his customer (increase in discount rate with increase in purchase volume). e.g. Get 10% discount for purchases above Rs. 10,000/-, 20% discount for purchases above Rs. 20,000/- and 30% discount for purchases above Rs. 30,000/-. such discounts are shown on the invoice itself. Some supplier also offer periodic/year ending discounts to their stockists, etc. e.g. Get additional discount of 1% if you purchase 10,000 pcs in a year, get additional discount 2% if you purchase 15,000 pcs in a year. Such discounts are established in the terms of an agreement entered into at or before the time of supply, though not shown on the invoice as the determined after the supply has been affected and generally at the year end.

Supplier shall be entitled to avil of the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

(D) Secondary discounts: These are the discounts which are not known at the time of supply or are offered after the supply is already over. e.g. M/s Jack supplies 10,000 packets of Juice to M/s Kane at Rs. 10/packet. Afterwards M/s Jack re-values it at Rs. 9/packet. Subsequently M/s Jack issue credit note to M/s Kane for Rs. 1/packet. It is hereby clarified that financial/commercial credit note(s) can be issued by the supplier even if the conditions mentioned in section 15(3)(b) of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.

However, such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in section 15(3)(b) of the said Act are not satisfied. In other words, value of supply shall not include any discount by way of issuance of credit note(s) except in case where the provision contained in section 15(3)(b) of the said Act are satisfied.

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