GST Impact Analysis | Additional discount, Free Item Schemes

‘Buy One Get Two Free’ or ‘Get a Bag free on purchasing items worth Rs 5,000/-‘ or ‘Get Additional 10% discount on annual purchases exceeding Rs 2,50,000/-‘ – Goods and Service Tax (GST) Impact Analysis

Sales promotion includes several communications activities that attempt to provide added value or incentives to consumers, wholesalers, retailers, or other organizational customers to stimulate immediate sales. Examples of devices used in sales promotion include coupons/cashbacks, free samples, Gift item, point-of-purchase (POP) displays, contests, volume based rebates, and other innovative tools.

In the current economic environment, whilst it is important for the sales team to be aware and continually introduce newer and innovative sales promotional activities – it is equally important for the finance/tax team to be prepared with the effective tax strategy for the different methods so adopted by the organisation.

In this article, we will discuss about the GST impact for the most commonly used sales promotion tools used by organisations.

Certain specific provisions which need to be kept in mind before the assessment:

Section 7: CGST Act – “the expression “supply” includes

• all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;….
• ….
• the activities specified in Schedule I, made or agreed to be made without a consideration;”

Section 15: CGST Act – “The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”

Section 16: CGST Act – “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business..”

The below note also considers the following GST Clarifications:

1. Circular No. Circular No. 92/11/2019-GST dated 7^th March 2019 and

2. Circular No. 105/24/2019-GST dated 28^th June 2019 issued by Central Board of Indirect Taxes and Customs (GST Policy Wing)

• Free Samples:

Examples: Forbes India Magazine Free Trial Issue to traveller in Air India flight; pharmaceutical companies providing drug samples to their stockists, medical practitioners, etc;

GST Analysis:

The above transaction does not fit within the definition of supply, since there is no consideration involve herein. Additionally, this transaction does not fall within the list included in Schedule I to the CGST Act. Since there is no supply involved, there is no question of GST applicability herein.

ITC (from buyer perspective)

Not applicable since no tax has been charged in this transaction in the first place.

ITC on the input/input service/ and capital goods (from supplier perspective):

ITC shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.

• Free Gifts offered with purchase:

Examples: Free cup set/travel bag offered to customer on buying above a specific threshold (say – Rs 1,500/- or Rs 5,000/-) – Shoppers Stop, Pantaloons, Khadims.

GST Analysis on the free gifts so offered:

The above transaction does not fit within the definition of supply within the meaning of Section 7 of the CGST Act, since there is no consideration involve herein. Additionally, this transaction does not fall within the list included in Schedule I to the CGST Act. Since there is no supply involved, there is no question of GST applicability herein.

Any ITC available to the buyer:

Not applicable since no tax has been charged in this transaction in the first place.

ITC on the input/input service/ and capital goods (from supplier perspective):

ITC shall be available to the supplier on the purchase cost of the free gifts so offered, since these costs are in nature of marketing spends and “has been used in the course or furtherance to his business”.

• Additional free units offered:

Examples: “Buy One, Get One free” “Buy two soaps and get one shampoo sachet free”– offered by seller of various FMCG products – tooth brush, soaps, biscuits, etc  – Colgate, ITC Sunfeast, HUL – Lux, etc

GST Analysis:

The GST Circular No. 92/11/2019 dated 7^th March 2019 clearly explains that the additional units so offered are “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 at best be treated as supplying two goods for the price of one.”

Hence, the above would constitute “supply” under the act, and the taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply. Insight

• Composite supply: Two or more supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration – Where a carton of footwear is packed and transported with insurance, the supply of footwear, packing materials, transport and insurance is a composite supply – supply of footwear is a principal supply, since footwear supply is predominant element of a composite supply and other parts of the composite supply are ancillary.

Taxability – GST rate applicable to the principal supply. (Footwear in the above example)

• Mixed Supply: Two or more individual supplies of goods or services, made in conjunction with each other for single price – which is not a composite supply.

Illustration – A supply of a package consisting of canned foods, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other.

It shall not be a mixed supply if these items are supplied separately;

Taxability – GST rate applicable to the particular supply (comprised within the mixed supply) attracting the highest rate of tax will be applied.

ITC (from buyer perspective)

Fully available based on the GST rate so applied (as explained above).

ITC on the input/input service/ and capital goods (from supplier perspective):

Fully available – if such input/input service/ and capital goods are used in relation to supply of goods or services or both as part of such offers.

• Volume Discounts offered:

Examples: “Buy More, Save More” or “Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of 2% if you purchase 15000 pieces in a year”

Staggered discount schemes offered by FMCG/Newspaper Companies to their wholesale/retail customers. – ABP Private Limited (on volumes of circulation distributed by the agents), Colgate, ITC Sunfeast, HUL – Lux, etc

GST Analysis:

The GST Circular No. 92/11/2019 dated 7^th March 2019 mentions that discounts offered by the suppliers to customers shall be excluded to determine the value of supply provided they satisfy the below parameters:

• if such discount has been duly recorded in the invoice issued in respect of such supply; and
• if such discounts have been offered after the supply has been effected (not reflected in the invoice so issued), then it has to be additionally established that—
• such discount was provided in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
• input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

ITC (from buyer perspective)

ITC is available to the extent mentioned in the invoice so issued by the supplier. Additionally, in case the discounts have been offered after supply has been effected – then the buyer needs to reverse the ITC as is attributable to the discount so offered by the supplier.

ITC on the input/input service/ and capital goods (from supplier perspective):

Fully available

• Post-Sales Discounts (with additional obligations)

Examples: FMCG Companies providing additional discounts to retailers/wholesale dealers if they undertake specific brand promotion activities, special sales drive, etc

GST Analysis:

Under such scenario, the discount so offered by the supplier is consideration paid (indirectly) by the supplier to the dealer/retailer to undertake such brand promotion activities, and hence this transaction is separate from the original sales (supply) made by the supplier to the dealers/retailers and is to be treated accordingly.

The dealer/retailer would be required to issue GST invoice and charge applicable GST to the original supplier.

ITC (from buyer perspective)

Herein, the original supplier will be entitled to claim ITC of the GST – so charged by the retailer/dealer.

• Credit Note – Other reductions in the sales price offered by the Supplier

GST Analysis:

In such cases, the supplier will not be allowed to reduce original GST liability.

ITC (from buyer perspective)

The dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial / commercial credit notes by the supplier of goods – as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount (Credit Notes) plus the amount of original tax charged by the supplier.

Conclusion:

The businesses needs to continue tracking the explanatory circulars issued by the Central Board of Indirect taxes and Customs – and make necessary adjustments (if required) in their GST set up accordingly to ensure optimum compliance and avoid possible future litigations.

Certain basic rules are evident from the above analysis –

• The dealers/buyers/retailers can claim GST credit only to the extent paid by the original supplier and evident in the GST invoice so issued by them.
• The post sales discount offered needs to be assessed by the respective suppliers in light of the above explanation and suitable GST strategy needs to be aligned therewith.
• In case the organisation is supplying bundled goods/services as part of its business, a suitable assessment needs to be made and conclusions arrived as to whether the supply is a composite or a mixed supply. Additionally the Information Technology system also needs to be geared and aligned to ensure the necessary compliances.
• It would be suggested for the FMCG companies to get their GST methods/set up independently assessed and reviewed by an external GST specialists.
• The regulators will also be requested to come out with industry wise Model Accepted Practises in order to ensure consistency and uniformity in GST compliance.