Restriction on the Input Tax Credit (ITC) in the CGST Act 2017 – Section 17(5)(h) Gift Vs Sales Promotion Expenses.

Introduction :-As per Section 17(5)(h) of the CGST Act, 2017, 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.” It simply restricts the availment of input credit in the case of gift by the registered person (hereinafter referred as RP). The reason for introduction of this clause is if a RP is not using the item of the input credit, then he cannot take input on the goods or services for the same which is established law/value chain of the VAT as well as CENVAT also.

Observation of this Clause :- first, we will discuss that “what is gift”. If there is gift, then only written off or disposed question arise as by way of gift is restricted, ‘Gift’ has not been defined under the CGST Act. Hence, reference will have to be made to other statutes and the jurisprudence available on the same. Gift, as per the Gift-Tax Act (18 of 1858) has been defined to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth.

Honourable Supreme Court in the case of the case of Sonia Bhatia v. State of UP [1981  (3) TMI 250 – Supreme Court], wherein ‘gift’ has been held to be a voluntary transfer of property by one to another, without any consideration or compensation therefor, A ‘gift’ is a gratuity and an act of generosity and does not require a consideration; if there is a consideration for the transaction, it is not a gift.

The Australian High Court in the case of Commissioner of Taxation (Cth) v. McPhail [1968] 41 ALJR 346 held that to constitute a ‘gift’ the property should be transferred voluntarily and not because of a contractual obligation.

In light of the above, one can reasonably conclude that to constitute a “gift” following element are required to be satisfied:—

a. Supply must be made without any contractual obligation. If any supply is made under a contractual obligation it cannot be termed as a ‘gift’.

b. Supply must be made without any consideration in money or money’s worth. Hence, supplies made out of love and affection or such other non- legal considerations can only be termed as


Gift Vs business Promotion Case Law of GST :-

SANOFI INDIA LIMITED – AAR Maharashtra 2019 – it was held that sales promotion scheme such as foreign tour, gift are in the nature of gift, there was  contractual obligation with company and their dealer for the benefit in the nature of sales promotion on achievement of specified target, the company is bound to give them these item still same is considered as gift, in my humble personal view, same is not correct as contractual obligation is not a gift as per the ruling of Hon’ble SC, so if there is not gift, then the question for the reversal of input tax credit wouldn’t arise.

In the case of M/s. Surfa Coats (India) Pvt. Ltd. AAR Karnataka 2019, it was held that gift given by the manufacture of paint to the carpenter’s on account of their code for the purpose of sales promotion is a gift because there was no contractual agreement between company to carpenter and same was without consideration, so same is gift and input tax credit are disallowed.

In the case of M/s BIOSTADT INDIA LIMITED, there was a scheme for the giving gold coin for the achievement of specified target, not having any written agreement for the same, same is considered as gift and input tax credit on the same is disallowed.

Analysis of this clause :-

As per the legal practice, meaning of one statue can be used to other statue to be extent but in the case of Kone Elevator India (P.) Ltd. v. State of Tamil Nadu [2014] (304) ELT 161 (SC). It has been held that, it should be strict and literal, what is applicable in one taxing statute may not be applied to another taxing statute (Per: P.M. Ibrahim Kalifulla.] (Para-84), so there is still contraction for the same for the difference between gift Vs sales promotion expenses of the RP. If any RP wants to get the benefit of the gift, there should be written agreement for the sales promotion scheme and same should be without consideration, then only he can try to get allowance of the input tax credit on sales promotion expenses but same is still case to case basis only. Further Section 17 is overriding effect on Section 16, so no one can claim directly that same is for the furtherance of the business, so burden is on Section 17 need to be removed, then only same is allowed as business expenditure.

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May 2021