[Ref: Circular No. 92/11/2019-GST dated 07th March, 2019]
There are Several Promotional Schemes (like Free Samples, Buy One Get One free offer, Discounts including ‘Buy More, Save More’ offer, Secondary Discount) which are offered by taxable persons to increase sales volume and to attract new customers for their products. Generally, the distribution of free samples method is usually adopted by newer products to increase his market area and to attract new customers for their products. Please note that free samples are generally distributed to unrelated person without any consideration for purpose to increase the business, market area and to attract new customers for their products. It is not so that the free samples could not be distributed to related person, it can be, but it is pertinent to note that supplies to related person without consideration are covered under Schedule I of the Central Goods and Services Tax 2017 (‘CGST, 2017’).
It means the chargeability of tax on the scheme of free supplies is required to be tested in accordance with Schedule I of the CGST, 2017. Moreover, implications of discounts shall be examined in accordance with Section 15 of CGST, 2017 which governs Value of Supply of particular transactions executed and the tax consequences in regard to the above promotional schemes need an examination in the light of restrictions imposed for availment of input tax credit (‘ITC’) & attention is invited towards the provisions of Section 17(5) of the CGST, 2017.
Therefore, Central Board of Indirect Taxes and Customs (‘Board’), vide their Circular No. 92/11/2019-GST dated 07th March, 2019, has examined these schemes and clarification on the aspects of taxability, valuation, availability or otherwise of ITC in the hands of the supplier. It is submitted that various representations have been received by Board seeking clarification on issues raised with respect to tax treatment of sales promotion schemes under GST regime. To ensure uniformity in the implementation of the law across the field formations, the Board, in exercise of its powers conferred under section 168(1) of the CGST, 2017 has issued aforesaid Circular No. 92/11/2019-GST dated 07th March, 2019. Some of these schemes have been examined and clarification on the aspects of taxability, valuation, availability or otherwise of Input Tax Credit in the hands of the supplier (“ITC”) in relation to the said schemes.
1. Distribution of free Samples and Gifts-
Whether the same is supply or not under GST?
It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. As per subclause (a) of sub-section (1) of section 7 of the said 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. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as “supply” under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, the Board clarified that samples which are supplied free of cost, without any consideration, do not qualify as “supply” under GST, except where the activity falls within the ambit of Schedule I of the CGST, 2017.
Position of ITC in case of distribution of free Samples and Gifts.
It is further submitted that the ITC of goods distributed as free samples shall be ineligible in terms of blocked credit in accordance with Section 17(5)(h) of the CGST Act 2017. 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. Thus, if the taxpayer avails ITC on account of a purchase of goods, and later distribute these goods as free samples, then he will have to reverse ITC so availed.
2. Buy One Get One free offer:
Taxability of supply under Buy One Get One free offer-
Sometimes, companies announce offers like ‘Buy One, Get One free’. For example, buy one soap and get one soap free’ or ‘Get one tooth brush free along with the purchase of tooth paste’. This method is, generally, adopted by FMCG companies and retails shopping outlets.
As per Section 7(1)(a) of CGST 2017, the goods or services which are supplied free of cost (without any consideration) shall not be treated as “supply” under GST (except in case of activities mentioned in Schedule I of the said Act). It may appear at first glance that in case of offers like ‘Buy One, Get One Free’, one item is being supplied free of cost without any consideration. In fact, 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 at 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 provisions of Section 8 of CGST, 2017.
Position of ITC in case of Buy One Get One free offer-
It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.
3. Discounts including ‘Buy More, Save More’ offers:
Value of supply in case ‘Buy More, Save More’ offers-
Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume). 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/-. Such discounts are shown on the invoice itself.
Some suppliers also offer periodic / year ending discounts to their stockists, etc. 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. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end. In commercial parlance, such discounts are colloquially referred to as “volume discounts”. Such discounts are passed on by the supplier through credit notes.
The Board clarified that discounts offered by the suppliers to customers (including staggered discount under ‘Buy more, save more’ scheme and post supply / volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in Section 15(3) of the CGST, 2017, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.
The provisions of Section 15(3) of CGST 2017 may be read as under:
“The value of supply shall not include any discount which is given-
(a) Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) After the supply has been effected, if-
(i) Such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoice; and
(ii) 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.”
Position of ITC in case of ‘Buy More, Save More’ offers-
It is further clarified that the supplier shall be entitled to avail 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.
4. Secondary Discounts
Issuing Credit Note for Secondary Discounts-
These are the discounts which are not known at the time of supply or are offered after the supply is already over. 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.
The provisions of sub-section (1) of section 34 of CGST, 2017 regarding issuing a credit note are as under:
“Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”
Further, representations have been received from the trade and industry that whether credit notes(s) under Section 34(1) of the said Act can be issued in such cases even if the conditions laid down in section 15(3)(b) of the said Act are not satisfied.
The Board 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.
Value of Supply in case of Secondary Discounts-
The Board clarified that 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) as explained above or by any other means, except in cases where the provisions contained in section 15(3)(b) of CGST 2017 are satisfied.
Position of ITC in case of Secondary Discounts-
There is no impact on availability or otherwise of ITC in the hands of supplier in this case.
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Value of Supply under Section 15(3) of CGST 2017 with reference to Discounts.
Numerous kinds of discounts are given by the suppliers to their customers namely, trade discount, cash discounts, quantity/volume/performance discounts etc. such discount are reduced from the sale price of the supply. Since, the value of a taxable supply is the transaction value, GST is leviable on the value after deducting the discount.
However, not all discounts offered by the supplier to their customers are allowed as a deduction from the value. Only such discounts which satisfy the conditions prescribed in Section 15(3) of CGST 2017, are allowed as deduction from the value. The essence of the conditions prescribed in Section 15(3) of CGST 2017 is that the price as established which do not fulfil the conditions specified in Section 15(3) of CGST 2017 are not deductible from the value i.e. GST in such case is levied on the gross value of the supply without considering the discount.
The provisions of Section 15(3) of CGST 2017 may be read as under:
“The value of supply shall not include any discount which is given-
(c) Before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(d) After the supply has been effected, if-
(iii) Such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoice; and
(iv) 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.”
For instances: The agreement of XYZ Ltd. with its dealers is that purchase of fans over 1000 pieces in the Diwali month will entitle them to discount 5% per fan. Therefore, the quantum of discount can be determined only at the end of Diwali month. However, since the agreement relating to such discount was in existence at the time of supply, and the discount can be worked out for each invoice, such post supply discount will be allowed as a deduction from the value of such supply of fans. XYZ Ltd. can issue credit note for 5% of the value of goods along with GST and claim adjustment of excess tax paid. The dealer must reverse the proportionate ITC on the relevant stock to bring it in line with reduced tax.
For instance: A Ltd. sold goods to B Ltd. on 25th June 2021 at Rs. 50,000 (exclusive taxes and discounts) and charged Rs. 9,000 as IGST @ 18%, along with the terms of supply stipulated that discount @ 2% will be given to B Ltd. if it makes the payment within one month of the supply. Accordingly, A Ltd. issue the invoice of Rs. 59,000 [Rs. 50,000 (Price of Goods) +Rs. 9000 (IGST)]. After getting the invoice from A Ltd., B Ltd. avails the ITC of Rs. 9,000 in the month of June, 2021.
Now, suppose B Ltd. makes the payment of the goods i.e. Rs. 59,000 on 20th July, 2021 (i.e. within one month of supply). Then A Ltd., immediate, will issue credit note for Rs. 1180 [Rs. 1,000 for value of discount and Rs. 180 for proportionate IGST leviable thereon] to B Ltd. After receiving credit note, B Ltd. reverses its ITC of Rs. 180 attributable to the discount given by A Ltd. and A Ltd. can reduce its GST liability of the month of July by Rs. 180.
In this case, ultimate payment by B Ltd. is Rs. 57,820 (Rs. 50,000 +Rs. 9,000 -Rs. 1,000- Rs. 180).
Further, in the said example, if the terms of supply did not provide for discount @ 2% for payment within one month but A Ltd. offers such discount to B Ltd. at the time of payment after negotiation, the discount will not be allowed as a deduction from the value. A Ltd. will issue a commercial credit note for only the value of discount, i.e. for Rs. 1,000. B Ltd. will not reverse any ITC and A Ltd. will also not able to reduce its GST liability for the month of July. In this case ultimate payment by B Ltd. is Rs. 58,000 (Rs. 50,000 +Rs. 9,000 -Rs. 1,000).
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.
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