Sponsorship – Reversal of ITC Unaddressed Anomaly under GST Act

Significance of Sponsorship

SPONSORSHIP is a tool for many organisation to increase visibility of it’s product among their potential future customer and you need not to be an expert to understand that this visibility is direct relationship between visibility & turnover of an organisation. And this is the basic reason which describes why expenditure on sponsorship contributes to significant chunk of marketing expenditure.

Meaning of Sponsorship

Sponsorship is not defined anywhere under GST Act , so for a clear & better understanding we need to refer Service Tax Act,1994 in which it was first introduced on 01^st May 2006 ( Notification No. 15/2006-S.T., dated 24.04.2006 ) through section 65 (99)(a) of Finance Act, 1994 where it was defined as :-

“Sponsorship” includes naming an event after the sponsor, displaying the sponsor’s company logo or trading name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition; but does not include any financial or other support in the form of donations or gifts, given by the donors subject to the condition that the service provider is under no obligation to provide anything in return to such donors.

Tax implication under GST on sponsorship:

1. Impact of Sponsorship on receiver of services or person paying consideration:

Sponsorship is a taxable supply under GST Act & Government { by virtue of Sec. 9 (3) } has issued a notification No. 13/2017 CGST ( Tax Rate) whereby sponsorship is mentioned as service for which tax liability is required to be discharged on Reverse Charge Mechanism (RCM).

2. Impact of Sponsorship on provider of services or person receiving consideration:

And for organisations who are providing sponsorship services are having negative impact on their Input Tax Credit, as they are required to reverse their ITC by virtue of rule 42 & 43 of CGST Rules, in proportion to Exempt supply {as defined under section 2(47) read with section 17(3) }

Illustration:

Mr X is organizing a musical event in March 2019 at Mumbai and in that event SPONSOR Pvt Ltd is giving sponsorship of ₹ 500,000/- . Break up of total revenue earned by Mr X in FY 2018-19 – a) From Taxable Supply ₹ 80,00,000/- b) From Exempt Supply ₹ 15,00,000/- c) From Sponsorship ₹ 5 ,00,000/- . And Input Tax Credit of ₹ 60,00,000/- is also available to Mr. X

Tax Implication 1: Tax on outward supply

Mr X will raise invoice for sponsorship service of ₹ 5,00,000/- (without GST) on SPONSOR Pvt Ltd who will pay GST @ 18% on ₹ 5,00,000/- ( under RCM) i.e, ₹ 90,000/-

Tax Implication 2: Reversal of Input Tax Credit

Mr X is having 20% of its total revenue as exempt revenue { (15 + 5) ÷ 100 } , therefore Mr X is required to reverse Input Tax Credit of ₹ 12,00,000/- { 60,00,000/- * 20 % }.

Author’s View:

Some major principles behind the construct of GST law which are relevant for our discussion and needs to be analysed in detail:-

1. Levy & Collection, Sec. 9 of CGST Act: To ensure that tax is collected on all taxable supplies made by any registered person.
2. Eligibility & Conditions for Input Tax Credit, Sec. 16 of CGST Act: To allow ITC related to all such services which are used for furtherance of business.
3. Blocked Credits, Section 17: To block ITC related to all such services which are used to provide EXEMPT outward supply.
4. To avoid double taxation: This was the main factor highlighted while presenting GST Bill in parliament.

I Analysis: In above illustration we can clearly see that Mr. X service provider is receiving amount of ₹ 500,000/- as revenue and he is reversing ITC of ₹ 1200,000/- .There is no way to justify logic behind reversing ITC more than the revenue which you have received.

II Analysis: Government is collecting revenue of ₹ 90,000/- from Sponsor Ltd and disallowing Credit of ₹ 12,00,000/- to Mr. X . This implies that Government is earning revenue (Direct + Indirect) of ₹ 12,90,000/- on transaction of ₹ 5,00,000/- which shows that double taxation is not completely eradicated from system.

Conclusion:

Reversal of ITC in case where Sponsorship service is provided by registered person doesn’t appear lawful and it is well expected that this anomaly will be fixed by GST Council very soon to ensure that double taxation on single transaction is avoided and loss of ITC to service provider is minimized.

On above discussion it is expected that in coming GST Council meetings one out of following two actions can be taken :-

1. Exception of SPONSORSHIP Services will be added to deeming provision under sec. 17 (3), or,
2. Amend No. 13/2017 CGST ( Tax Rate) , for keeping SPONSORSHIP service under forward charge.

Any one of above action would result in excluding sponsorship services from exempt supply while calculating reversal under rule 42 & 43.

Key Provisions :

Sec 9(3) : The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

16. (1) 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 and the said amount shall be credited to the electronic credit ledger of such person.

Deeming Provision { Sec 17 (3) } : The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building

Exempt Supply { Section 2 (78) } : “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

Non Taxable { Section 2 (78) } :- “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act