Applicability and Impact of Goods and Services Tax (‘GST’) on sale promotion schemes has always been a contention of litigation since the start of GST.
Every business has a marketing and sales plan in order to increase sales volume, attract new customers, and achieve its business objectives. Sales promotion schemes are the key drivers to supplement, co-ordinate, and achieve functional objectives.
With a diverse collection of incentive and innovative ideas, sale promotion schemes stimulate consumer purchasing behaviour.
However the problems and many industries related issues arises due to the provision contain in section 17(5)(h) of CGST Act 2017.
As per sec 17(5)(h), business cannot take input tax credits in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Accordingly, inputs tax credit over such goods which is used or disposed of by the way of gift or free sample should be reversed.
This created all of question for the business and all the sales promotion scheme comes under the scanner.
In order to put the issue to rest, the Central Board of Indirect Taxes and Customs (‘CBIC’) has issued Circular No. 92/11/2019-GST dated 7 March 2019.
The Circular contains clarifications on the impact of GST on sales promotion schemes and provide clarification on Impact of GST various type of sales promotion scheme.
The Circular has clarified several grey areas in the GST law and has brought a much needed certainty in GST treatment on sales promotion schemes.
The summary of the Circular is given below:
1. Treatment of Free Samples and Gifts under GST
Businesses distribute free samples of their products to various stakeholders in the supply chain. Similarly, businesses may gift their products to employees, customers, vendors and well-wishers.
These activities are recorded as a cost to the business by reducing the value from the inventory recorded in books.
The treatment of Free Samples and Gifts under GST is summarised below:
1.1 Free Samples and Gifts will not be treated as supply:
Under Section 7(1)(a) of the Central Goods and Services Act, 2017 (‘CGST Act’), supply includes any transaction undertaken for consideration.
Therefore, any items supplied without any consideration would not qualify as “supplies” under the GST law, except when the activity falls within the ambit of Schedule I of the CGST Act.
In business parlance, Free Samples and Gifts are supplied free of cost (without any consideration). Hence, they will not be considered as supplies under GST law.
1.2 Input tax credit to be reversed on goods distributed as Free Samples and Gifts:
As per Section 17(5)(h) of the CGST Act, Input Tax Credit (‘ITC’) available on inputs, ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Hence, taxpayers should reverse the ITC to the extent of inputs used in relation to Free Samples and Gifts.
However, ITC would be available if Free Samples and Gifts are used in relation to activities mentioned in Schedule I of CGST Act.
2. Treatment of Buy One Get One Free offer under GST
Businesses may bundle one or more products for sale along with a given product. The cost of the other product is not separately charged to customers but is termed as a free item. This is generally referred to as Buy One Get One Free offer.
The treatment of Buy One Get One Free offer schemes under GST is summarised below:
2.1 Goods supplied under buy one get one offer will be treated as supply:
From a consumer standpoint, the transaction may appear to be supply one good ‘free of cost’ without any consideration.
However, from a business perspective, the transaction should be considered as supply of two goods at the same price marked on the product; and should not be considered as an individual supply of free goods.
On similar lines, the transaction will be classified as supply of two goods for the price of one under GST.
2.2 Taxability of Goods supplied under buy one get one offers under GST:
In case of supply of more than one goods, the GST law provides for taxability of the transaction depending on the nature of supplies and transaction.
The transaction could be classified either as a mixed supply or composite supply as per Section 8 of the CGST Act.
2.2.1 Taxability as per Composite supply:
Under the GST law, composite supply involves a supply comprising of two or more goods/services, which are naturally bundled and supplied with each other in the ordinary course of business.
The supplies are generally sold together as they are inextricably connected to each other. One of the supply in the transaction would be the principal supply.
GST tax rate for composite supply: In case of composite supply, the GST rate for the principal supply shall be considered
2.2.2 Mixed supply:
Under the GST law, mixed supply involves supply of a combination of two or more goods/ services made together for a single price. Each of these items could be sold separately and they are not dependent on each other.
GST Rate for mixed supply: In case of mixed supply, the GST rate for the supply attracting highest GST rate shall be considered
2.3 Availability of ITC in case of buy one and get one offers under GST
ITC would be available on goods supplied under Buy One Get One Free schemes.
Hence provision of section 17(5)(h) would not applicable in case of buy one get one offers. Input tax credit on such supplies will not be reversed.
3. Treatment of Volume Discounts (‘Buy more, save more’ offers) under GST
In order to incentivise distributors and dealers for increasing the sales volume, businesses offer discounts based on targets, quantity, value, volumes etc. as volume discounts.
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
Discounts including Buy more, save more etc. may be provided at the point of supply or at a later date pursuant to prior agreement(s).
Discounts provided at the point of sale are shown as a reduction the invoice itself. Discounts provided subsequent to sale are passed through credit notes.
The treatment of volume discounts under GST is summarised below:
3.1 Discount provided at the point of supply
Any discount provided at the point of supply shall be excluded from the value of supply. The discount shall be excluded from GST if the conditions prescribed in Section 15(3) of CSGT Act are satisfied.
Hence, GST would not be applicable through the discount offered in the invoice.
3.2 Discount provided after the point of supply:
Any discount provided through a credit note subsequent to the point of supply shall also be excluded from the value of supply, as per Section 15(3) of CGST Act.
In such case, the recipient shall reverse the ITC claimed earlier based on the credit note issued by seller.
3.3 Availability of ITC on volume discounts under GST
ITC would be available on goods supplied and no reversal of ITC would be required.
4. Treatment of Secondary Discounts under GST
In certain situations, additional discounts are offered subsequent to sale of goods. The discount may be on account of revaluation in the price of goods, return of goods or any deficiencies in goods etc.
These discounts are known as secondary discounts or post-sale discount. These discounts are passed through credit notes.
The treatment of secondary discounts under GST is summarised below:
4.1 Credit note at the point of supply
As per Section 34(1) of CGST Act, credit notes should be issued only in case of any commercial transaction.
Any secondary discount provided subsequent to the point of supply shall not be excluded from the value of supply.
Hence, GST would apply even on the ‘discounted portion’ of supply.
4.2 Credit note subsequent to the point of supply
However, if the conditions prescribed in Section 15(3)(b) of CGST Act are fulfilled, the GST on the discount portion may be reversed by issuing a credit note.
In such case, the recipient shall reverse the ITC claimed earlier based on the credit note issued by seller.
4.3 Availability of ITC on discount provided after sales under GST
ITC would be available on goods supplied and no reversal of ITC would be required.
Conclusion
These clarifications by the CBIC on sales promotion scheme under GST are a welcome move and provides clarity to several sectors.
The pharmaceuticals and the Fast Moving Consumer Goods (‘FMCG’) sectors predominantly deploy the aforementioned sales promotion schemes.
This Circular brings a lot of certainty in the GST treatment of sales promotion schemes.
Taxpayers may evaluate the treatment of GST based on their specific facts.
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