pri Input Tax Credit (ITC) on Sales Promotional Schemes Input Tax Credit (ITC) on Sales Promotional Schemes

CA Pardeep Kumar


Earlier in December 2018 the Hon’ble AAR of Maharashtra vide its Advance Ruling No.GST-ARA-72/2018-19/B-165 dated 20th December, 2018 in the case of Biostadt India Limited ruled against the applicant and held that input tax credit shall not be available for the procurement of ‘gold coins’ to be offered under the sales promotional scheme of the applicant company to its customers to encourage them to meet the business targets.

Brief facts of the Ruling

The facts in brief are that the Biostadt India Ltd is a Mumbai based company & is engaged in the business of developing, manufacturing and distributing crop protection chemicals and hybrid seeds. In order to achieve sales and marketing objectives, they have launched a new sales promotion scheme namely “The kharif Gold Scheme 2018” for its customers and decided to give gold coins (10 grams and 8 grams) on a purchase in the prescribed quantity.

The company approached AAR on whether the aforesaid gold scheme announced by it would allow it to claim input tax credit on procurement of “gold coins” which are to be distributed to customers as per the scheme.

Arguments advanced by the applicant before AAR

The company argued that, it is entitled to credit of input tax because the scheme launched by it is linked purely with the advancement of company’s business & would grant an advantage to it over the competitors. The company further contended that “nothing comes free in business”. Each and every act done for business comes with a consideration. Applying same analogy, gold coins are not given away freely to the customers.

The applicant has a contractual arrangement with the customer wherein if he purchases certain amount of company’s product or makes payment in a prescribed manner then he shall be entitled to a gold coin of specific weight. Gold coin will not be available to the customer unless he satisfies the criteria laid under the scheme. Giving away gold coins to customer cannot be termed as “voluntary” act of the applicant company.

Arguments of the Tax Authorities

The tax authorities argued that the gold coins to be distributed by the applicant do not qualify as ‘inputs’ & further it is not essential for making of taxable supply for consideration.

Ruling of AAR

The Hon’ble AAR relying on Section 17(5)(h) of the Central GST Act, which says, “input credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples” treated the scheme as “gift” & held that input tax credit on gifts will not be available when no GST is paid on its disposal .

The AAR observed that gold coins are not given by the applicant under any contractual obligation as no contract/agreement has been signed by customers in writing accepting the scheme floated by the applicant. Accordingly, the gold coins are given by the applicant voluntarily on fulfilment of certain conditions.

Central Board of Indirect Taxes and Custom (CBIC) recent Circular

The Central Board of Indirect Taxes and Custom (CBIC) vide its Circular No. 92/11/2019-GST Dated the 7th March, 2019 has clarified the position regarding the availability of Input Tax Credit (ITC) in connection with sales promotion schemes under GST. These promotional schemes are offered by the taxable persons to increase sales volume and to attract new customers for their products. A brief summary of clarifications regarding availability of ITC on such schemes as per the aforesaid circular is given below:-

Sr. No. Nature of promotional offer Description Input Tax Credit(ITC)
1. Free samples and gifts For example providing drug samples to the medicine stockists, dealers, medical practitioners, etc. without charging any consideration.


No ITC will be available under section 17(5)(h).

However, ITC will be available in case transaction covered in Schedule I.

2. Buy one get one free offer For example, “buy one soap and get one soap free” or “Get one tooth brush free along with the purchase of tooth paste”. ITC shall be available.
3. Discounts including ‘Buy more, save more’ offers (i) Cases where such discounts are shown on the invoice itself. For example- Get 10 % discount for purchases above Rs.5000/-, 20% discount for purchases above Rs.10,000/- and 30% discount for purchases above Rs.20,000/-.

(ii) Cases where such discounts are passed on by the supplier through credit notes. For example- 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.

ITC shall be available.
4. Secondary Discounts For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs.10/- per packet. Afterwards M/s A re-values it at Rs.9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs.1/- per packet. ITC shall be available.

As per above stated table the ITC would be available in the case of various sales promotional schemes as cited above, however the same shall not be available in the case of distribution of ‘gifts’ or ‘free samples’.

Keeping in view the aforesaid the circular has settled the issues to a large extent and has cut short the litigation as far as the ITC in connection with various sales promotional schemes, as cited above, are concerned. However, the distribution of ‘gift’ or ‘free samples’ will remain a grey areas reason being “without consideration” and “gift” very vague. Further, the tax authorities will deny the ITC for the same by relying on aforesaid CBIC circular and the business entities may keep on claiming the same as their genuine ‘business marketing expenditure’.

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July 2021