GST Implications on Gift by Employer to Employee (Taxability & ITC)

Let’s Understand it with Example

“The company has given gifts to employees as a reward for their performance. Gift includes iPad and i-phone, the value of the i-phone exceeds INR 50k, will this fall in the ambit of supply as per Schedule-I?

Do we need to raise a tax invoice and discharge the tax liability on whether the company can avail of the input tax credit?

Issue 1

The moot question to be addressed is whether The company has given gifts to employees as a reward for their performance. Gift includes iPad and i-phone, the value of the i-phone exceeds INR 50k, will this fall in the ambit of supply as per Schedule-I?

• Meaning of ‘Taxable Event’ as it plays a crucial role in ascertaining the chargeability of tax. So, before making further discussion, we should also understand the “Taxable Event” under GST.

What is a ‘Taxable Event’ in GST?

‘Taxable Event’ under GST is a supply of goods or services. Section 7(1) of the CGST Act states that ‘Supply’ includes: –

All forms of supply of goods or services 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.

Thus, there are 2 important constituents to determine the taxable event: –

• Firstly, there should be a supply of goods or services for consideration and
• Secondly, such supply should be in the course or furtherance of business

The question arises as to what constitutes a gift as a gift has not been defined in the GST law.

As per the Press Release by CBIC which states, In common parlance, a gift is made without consideration, is voluntary in nature, and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift.

On the reading of the above definitions of ‘Gift’ and ‘Taxable Event’, it becomes apparently clear that ‘Gift’ does not fall under the definition of Supply, as there is no consideration involved in even though such gifts might have been in the course or furtherance of business. Further, Schedule-I to CGST Act, 2017 specifies certain activities which shall be treated as ‘Supply’ even where there is no consideration.

Attention is drawn to Schedule-1 of CCGS Act 2017:

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

1. …………………….

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided 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.”

Employee and the Employer have been proclaimed as related persons for the purpose of CGST/SGST Act, vide Explanation (a) (iii)under Section 15.

Sec 7(1)(c) read along with Schedule I yes, it is quietly covered in it and the proviso which contemplates an exception, that above proviso would not be triggered here, Because the value of gifts exceeded Rs.50,000 in a financial year which is provided by the employer by the employee as it has to be seen employee wise not gift wise.

Opinion:

So applying the logic I am assuming here the facts that every employee is been gifted the material worth more than Rs.50,000.

The exception contemplated in the proviso will not come to the rescue, therefore it is quietly covered under the provisions of schedule 1 read with section 7(1)(c) of the CGST Act.

I confer the fact that there is an outward supply, it is deemed supply as per 7(1)(c) that can’t be disputed here.

However, if the gift is in the nature of incentive for doing exceptional work, then it may be considered as compensation for doing good work and the same may be treated as a payment made in the course of employment, However, this will lead to legal battles in the Court of Law.

Issue No 2

Do we need to raise a tax invoice and discharge the tax liability in respect of gifts of value more than ₹ 50,000 made without consideration by the employer to the employee?

• What is Tax Invoice under GST?

Under the GST regime, an “invoice” or “tax invoice” means the tax invoice referred to in section 31 of the CGST Act, 2017.

A registered person supplying taxable goods shall, before or at the time of –

• removal of goods for supply to the recipient, where the supply involves movement of goods; or
• delivery of goods or making available thereof to the recipient, in any other case,

issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed.

I already confer the fact that the gifts of value more than ₹ 50,000 made without consideration is an outward supply and such supply is not exempt elsewhere in the act.

Opinion:

Based on the discussion involved in issue 1 and issue 2, I opine that the Employer is required to raise a tax invoice and discharged the tax liability in respect of gifts of value more than ₹ 50,000 made without consideration by the employer to the employee if the employer, provided he is liable to take registration under GST as per Section 22 of CGST Act, 2017.

Issue No 3

Whether the company can avail of the input tax credit in respect of gifts of value more than ₹ 50,000 made without consideration by the employer to the employee?

For analysing this issue firstly understand the context of relevant sections 16(1) and 17(5)(h) of the CGST Act, 2017.

Section 16 (1) of CGST Act: Every taxpayer is entitled to take credit for input tax charged on the supply of goods or services which are used in the course or furtherance of his business.

On referring to section 17(5) opening lines, which states that Notwithstanding anything contained in section 16(1), thus it is very clear that section 17 has an overriding effect over section 16(1).

Further, as per section 17(5)(h), Input Tax Credit will 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.

However, it is important to refer the circular 92/11/2019-GST – dated 7th march, 2019 which is a beneficial circular that states that clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit 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.

However, where the activity of distribution of gifts or free samples falls within the scope of supply on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.

But now the question arises whether the circular issued by CBIC will prevail over CGST Act,2017?

Analyzing it with some relevant judgments:

1. Appeal Number: W.P.(MD) No. 20504 of 2019, Date of Judgement/Order: 19/11/2019

M/s. Precot Meridian Limited Vs Commissioner of Customs (Madras High Court). It is held that circulars cannot prevail over the statute. Circulars are issued only to clarify the statutory provision and they cannot alter or prevail over the statutory provision. In that circumstance, it is clear that the explanation of provisions of the drawback has nothing to do with the IGST refund.

2. In the case of Paper Products Ltd. Versus Commissioner of Central Excise [1999 (8) TMI 70 – SUPREME COURT OF INDIA]: –

In this decision, it was held that circulars issued by CBEC are binding on Departmental authorities and they can’t take the contrary stand. However, assessee can contest the validity or legality of such departmental circulars or instructions. It was further held that the department does not have the right to file an appeal against the correctness or binding nature of circular and the department’s action have to be consistent with circulars. The ratio of this judgment precluded the right of the department to file an appeal against the correctness of the binding nature of the circulars.

Opinion:

Thus, basis the above discussion, we opine that the company can avail of the input tax credit in respect of gifts of value more than ₹ 50,000 made without consideration by the employer to the employee.

Although the circular contradicts with provision assessee can claim itc as the circulars are binding on the department and the department doesn’t have the right to file an appeal against the same.

One may argue that circular can’t supplant the law it only supplements the law. But the circulars which are beneficial for the assessee have a retrospective effect (as ordered by the Supreme Court in judgment in the case of Suchitra Components Ltd. Vs. Commissioner – 2008(11) ST- R430(SC), and Jai Fibres Ltd. vs. CCE, Mumbai -2007 (218) E.L.T. 484 (S.C.), has held that a beneficial circular has to be applied retrospectively).