This circular was on sales promotional schemes and the availability of tax credit (ITC). It clarified the position of GST as under: A. Free Samples/ Gifts: In business free samples or gifts are given to increase sales and get new customers, wean back those who shifted their loyalty. This is in furtherance of business. Samples to be distinguished from Demonstration pieces.
Demonstration items like: Car, White Goods carried by the salesman, pieces put up in distributors/retailers premises would be displayed and after some time returned. They are part of the inventory of the supplier. On these items, there is no need to either charge the GST nor is there need to reverse the GST. Note: However if it is lost, destroyed, written off then the need to reverse the ITC would arise.
A1. Some suppliers are paying GST on such samples/ gifts and others are not. GST law provides that credit can be taken for taxable supplies only. Samples/ gifts as per section 7 (1) are not “supply” therefore in normal course they would not be eligible for ITC.
No ensure fairness now supplier has 2 options:
(i) Does not avail (reverses with interest at later date) the ITC for such activity. No need to charge GST on the sample or gift.
(ii) Avail the credit in which case he can pay the GST on such gift/sample.
In these cases, the receiver also receives such samples in course of business and therefore he also would be able to avail the credit as long as he is paying the GST charged. This circular allows one to get past the restriction in section 17(5) (h) on not being able to avail credit on gifts or free sample.
Can a circular override the GST Act is a question which arises?
Circulars issued to further fairness and beneficial to the taxpayer can be relied on as per settled Supreme Court decisions. Therefore this aberration can be taken advantage of and would be valid in law.
A2. We see buy one take one free for clothes and other consumer goods. This again is to generate sales. The additional volume expected would ensure more profit on the whole. There was a lot of confusion on whether packing should be explicit or not, should both times be the same or not etc.
The circular clarifies that the price is deemed to be for both. If it is a composite supply then the rate applicable would be the rate of the principal supply. If it is mixed supply (toothpaste with a brush, TV with Gold Coin etc. then the rate applicable would be the higher one. It is possible that distributors are also given such incentives which could be said to be gifts like a foreign trip. One could examine whether the need to reverse the credit for the “free” item can be done to optimize the tax.
B. Discount on the philosophy of “buy more save more”. This could be offered to distributors, sub-distributors or retailers. It could be for products which are used for business or those only for consumers. In business B2B activity the type of activity could be classified into a) high margin or b) Low margin. In case of high margin, the retailer may be selling the products at procurement price or lower due to the eligibility of target discounts which would bring in the margin.
In such cases, the supplier may issue a credit note with GST. Retailer ( receiver) would reverse the credit) and then the supplier would be able to adjust the excess tax paid. The rule has been amended to enable credit for several invoices through 1 credit note. However, the portal as on date has not enabled it. In these cases, if financial credit note ( credit without GST) is issued by the supplier the distributor/ retailer may end up with an accumulation of credit which cannot be utilized and would become a cost.
Note: It would be reasonable to consider that no ITC has been availed in case of supplies to unregistered persons in business or those under Composition as both of them cannot avail the ITC. However, the mechanism for re-credit / adjustment needs to be enabled in the portal. In the case of low margin products, the promotional schemes would also be less. In these cases, the supplier may issue credit notes without GST (called financial credit notes). The receiver does not have to make any adjustment and would be eligible for the full credit as received in the original invoice. This would not be considered exempt supply for reversal of credit under Rule 42.
Conclusion: This circular brings some clarity and furthers the genuine interests of the taxpayer considering the ground realities. It also meets the need for clarity in the law.