The Festive Season of Diwali is around the Corner and with the coming of a festive season every business plans to provide Complimentary Freebies on account of courtesy or public relationship or for the promotion of business.
Two major questions arise on this front:
1. Whether freebies given fall within the definition of supply under the CGST Act, 2017 and thus, whether the applicant is required to pay GST on such freebies?
2. Whether the applicant is eligible to claim Input Tax Credit (for short “ITC”) in respect of such freebies?
On the basis of the question, we can bifurcate the Gifts/ Freebies into the 4 following categories:
(a) Gifts given to Employees
(b) Gifts given as a part of Sales Promotion
(c) Gifts given along with a Supply of a product
(d) Promotional Goods distributed with Company Logo
Let's check the Taxability and Input Credit Provisions on each one of them below:
(a) Gifts given to Employees
From the definition of supply given under Section 7 of the CGST Act, it can be concluded that to constitute a “supply” following elements are required to be satisfied:-
- It should be made in the course or furtherance of business and
- There should be some consideration involved
Now it has been specifically mentioned that as per Entry Number 2 of schedule I, activities are to be treated as supply even if made without consideration when they are 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.50,000 in value in a financial year by an employer to an employee shall not be treated as a supply of goods or services or both.
Subsequently in case of supply of Gifts exceeding Rs. 50,000 to employees the ITC on there Procurement shall have to be reversed.
(b) Gifts given as a part of Sales Promotion
Sales Promotion is an expense directly incurred for the furtherance of Business and hence the same is directly covered under the term "Supply" and would be chargeable to tax irrespective of the value of supply.
Subsequently, ITC on their procurement shall be available.
(c) Gifts given along with a Supply of a product (i.e. Bundled Supply)
In this case, free gifts are provided on the purchase of a particular product. These kinds of supply fall 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 to GST at the Rate applicable to the main supply.
Subsequently, ITC on their procurement shall be available.
(d) Promotional Goods distributed with Company Logo on them
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 leading to the charge of GST& subsequently ITC will be available on them.
The author is a practicing Chartered Accountant specialising in Indirect Taxation and can also be reached at office@niketassociates.co.in
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