The taxability and availability of Input Tax Credit on Gifts and donations have always been a matter of discussion and confusion. With the implementation of GST, the term gift has become a buzzword. The gifts are provided by the company for the purpose of advancement of business or for sales promotion. Different types are gifts are given for the furtherance of business. Gifts may be branded gifts or unbranded gifts, festival gifts or promotional / incentive gifts. The law has tried to include some specific provisions relating to gifts under GST. However, there are still some unresolved problems which may lead to controversy in the near future.
Let us discuss some provisions and challenges to be faced in the future.
It is important to understand the meaning of the term “gift”. The GST has not specifically defined the term “gift”. Thus the definition provided under Section 2(xii) of the Gift Tax Act defines gift as the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth. Thus, a gift is a gratuity and an act of generosity and does not require a consideration, but there can be none; if there is a consideration for the transaction it is not a gift. It was further held that a gift is a transfer which does not contain any element of consideration in any shape or form – Love, affection, spiritual benefit and many other factors may enter in the intention of the donor to make a gift; but these considerations cannot be called or held to be legal considerations as understood. Further, it is necessary that there should not be any contractual obligation or involvement of consideration for anything to be considered as gift.
On analyzing the term “supply” under Section 7 of the CGST Act, 2017; the relevant part of the said provision reads as under:
All forms of supply of goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. From the above provision, one can conclude that to constitute a “supply” following elements are required to be satisfied:-
Apparently, it seems that gifts do not fall under supply but before reaching at the final conclusion we need to analyze the same in depth and, therefore, we need to refer to some other provisions under the Act. The provision related to availability of ITC on gifts has been dealt with at two specific places under the GST Law. Under Section 17 (5) (h) of CGST Act, 2017 the relevant provision of the said provision specifies that:
Notwithstanding anything contained in sub-section (1) of Section 16 and subsection (1) of Section 18, input credit shall not be available in respect to the following namely:-
“Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”
The second provision falls under Entry Number 2 of schedule I :
Activities to be treated as supply even if made without consideration – supply of goods or services or both between related persons or distinct persons as specified in section 25, when made in the course or furtherance of business provided the gifts not exceeding Rs.50000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Whether the gifts to employee by employer can be considered as supply?
As per the explanation to section 15 of the CGST Act, 2017 the persons shall be deemed to be related persons if
Such persons are employer and employee
From the above provision it can be concluded that the employer-employee shall be deemed to be related person under GST. Now as per Schedule III of CGST Act, the service provided by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor as a supply of services. As per the clarification released by Govt. any perquisite forming part of the employment agreement, i.,e included in the CTC of employee shall not be considered as supply. It follows therefrom that supply by the employer to the employee in terms of a contractual agreement entered into between the employer and the employee will not be subjected to GST.
On review of the clarification released by Government any perquisite forming part of the employment agreement i.,e included in employee’s CTC shall not be considered as supply. It follows therefrom that supply by the employer to the employee in terms of a contractual agreement entered into between the employer and employee will not be subjected to GST.
In case the gift does not form part of the employment agreement gift provided to employees above Rs.50000 will be covered under supply & therefore ITC will be available on it but the gifts up to the value of Rs.50000 will be gift not falling under Entry No.2 of Schedule I, thus there will be reversal of ITC.
Sales promotion can be considered as supply or not
Sales promotion is an expense for the furtherance of business. For considering the supply, there should be some consideration. To answer whether sales promotion can be considered as supply or not, one needs to understand the term “inducement” used in the definition of consideration. Inducement means to give something to a person so that he will do something else in return. The sales promotion may fall under the definition of supply as nothing in the business world is free & something in return is involved in it.
Free gifts or articles along with the supply of a product
In this case, free gifts are provided on purchase of a particular product. These kinds of supply falls under the category of mixed supply which cannot be naturally bundled. Thus these kinds of gifts will fall under the category of supply and taxable.
Tours/ Gifts provided by Pharmaceutical companies to Doctors
The foreign tours/gifts such as A.C, microwave etc., are provided by the pharmaceutical companies for promotional purpose so that the doctors will refer the medicines of their company in the prescriptions. Since there is involvement of consideration, this may not fall under the definition of a gift. There may be another viewpoint also that there is no contractual obligation involved in this situation, as it is completely called of doctor whether he will prescribe the medicines of the company or not. He is not under any legal obligation to do so. As the consideration is not directly linked with the gift provided to doctors, it may be considered as gift.
Diwali Gift to employees
The gifts to employees exceeding Rs. 50000 are specifically covered under Entry No.2 of Schedule I. Hence, gifts to employees up to the value of Rs.50000 will be considered as gifts and the ITC on the same is required to be reversed as per S. 17 (5).
Diwali Gift to Business Client
It is a gift provided on an occasion to the client & it does not lead to business promotion, rather it is provided for maintaining good relation with the client. Due to no involvement of consideration & contractual obligation, it may fall under the definition of gift and ITC on the same needs to be reversed as per S.17 (5) of CGST Act.
In this scheme, the vendor provides the vouchers as an instrument to be used for making payment of the consideration on the next purchase. For example, if free voucher of Rs.500 is provided on purchase of Rs.1000; GST will be liable to be paid on full value of supply.
Promotional goods with company logo provided to distributors
These gifts are provided without any consideration. Hence, the same will fall under the definition of gift & hence, ITC needs to be reversed. However, if these items are given to related parties then the same will be treated as supply & ITC will be available.
In brief, it can be said that in some cases gifts provided are covered under supply & in some other cases it is out of the ambit of supply, therefore each case needs to be analyzed separately after considering the legal provisions.
Disclaimer: The above should be considered as broad guidance and not a considered opinion as fact and circumstances could be different and change in the law is ongoing.