Who doesn’t like discounts or some sale offers?
Everyone likes them. And that’s the reason why various stores and dealers offer you goods at discounted prices or with some amazing offers. This in turn, helps them to increase their sales and create a strong customer base. These are generally referred to as “Promotional schemes”.
But what’s the treatment of such promotional schemes under GST? Can you consider them as supply? Can you claim Input Tax Credit on them? Let’s have a look:
1. FREE SAMPLES AND GIFTS
You must have got small toothpaste packets during a seminar on oral hygiene in your school. The toothpaste packet mentions ‘Not for sale’ on it. Various toothpaste brands offer such type of free samples/gifts to those present at the seminar.
Also, pharmaceutical companies provide free drug samples to the medical practitioners, etc.
These samples are supplied without any consideration. And as per the provisions of the Act, the goods and/or services supplied free of cost or without any consideration shall not be treated as Supply for the purpose of levy of GST (except in case of activities mentioned in Schedule I of the Act).
Further, you cannot claim Input Tax Credit (ITC) on the inputs, input services and capital goods to the extent they are used in relation to the free samples and gifts supplied without any consideration.
Relevant provisions of the Act:
“Section 7(1)- For the purposes of this Act, the expression “supply” includes––
(a) 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;”
“Section 17(5)- Notwithstanding anything contained in sub-section (1) of section 16 and subsection
(1) of section 18, input tax credit shall not be available in respect of the following namely:
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;“
“Schedule I: ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
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.
3. Supply of goods—
(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business”
2. BUY ONE, GET ONE FREE
In Big Bazaar or on online platforms like Myntra, you must have come across such ‘Buy One Get One Free’ offers. You can find this offer on various products like grocery items, clothes, electrical appliances, etc. These offers are for some limited period of time and you get notifications like “Hurry, offer ends in few hours/days or Limited offer alert”.
This is not an individual supply of free goods, rather this is supply of two or more individual supplies where a single price is charged for the entire supply. It is supply of two goods for the price of one. So, for the purpose of levy of GST , you will have to first determine whether such supply is composite supply or mixed supply and apply tax rate accordingly.
Further, you can claim Input Tax Credit (ITC) on the inputs, input services and capital goods to the extent they are used in relation to supply of goods and/or services under such offers.
Relevant definitions under the Act:
“composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
“mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. Each of the items can be supplied separately and is not dependent on any other.
3. BUY MORE, SAVE MORE
If you have purchased grocery items from Paytm Mall, then you must have come across such ‘Buy more, save more’ offers. These offers provide you discounts if you purchase the no. of items specified therein or more. Like 10% discount on purchase of minimum 5 items. These kind of offers urge you to spend a little more to get additional discount benefits.
These are generally referred to as ‘volume discounts’ commercially. You , as a supplier, pass on such discounts through credit notes. So, for the purpose of levy of GST, exclude the discount part from the value of supply subject to parameters specified under Sec.15(3) of the Act.
Further, you can claim Input Tax Credit (ITC) on the inputs, input services and capital goods to the extent they are used in relation to supply of goods and/or services on such discounts.
Relevant provisions of the Act:
“Section 15(3)- The value of the 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 invoices; 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”
4. SECONDARY DISCOUNTS
The discounts which are not known at the time of supply or are offered after the supply is already over are called ‘Secondary discounts’. Like you sell (supply) 100 items of ₹11/- each to a retailer. Afterwards, you revalue it to ₹10/- each. Then, you have to issue credit note of ₹1/- each.
So, for the purpose of levy of GST, there’s no need to exclude secondary discounts from the value of supply because these are not known at the time of supply and conditions u/s 15(3)(b) are not satisfied.
Further, you can claim Input tax Credit (ITC) in a normal manner. These discounts do not affect the availability of ITC.
Relevant provisions of the Act:
“Section 34(1)- 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.”
With this, I end my article. Hope it is helpful. 🙂
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