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In recent times there has been great deal of confusion on availment of credit on sales promotion expenses. Such expenses could be incurred on items such as on the pens, diaries, calendars, key chains, T-shirts/garments with logo/brand name, display boards, printed posters, standees, hangers used to display suppliers products. These items bearing brand name of the supplier could be distributed to the dealers and end customers. The purpose of giving such items is to enhance the goodwill of the suppliers and to maintain customer loyalty leading to enhanced sales/supplies done to customers.

The Advance rulings which have emerged in past few years under GST in respect of the ITC on sales promotion or brand promotion expenses have consistently sought to deny the credit benefit. One of the latest rulings in Karnataka being in Page Industries AAAR[Order No. KAR/AAAR/05/2021] where the Appellate Authority set aside the ruling No. KAR ADRG 54/2020 dated 15.12.2020 passed by the Advance Ruling Authority and held that GST paid on the procurement of promotional items supplied to the franchisees and distributors free of charge will not be eligible for input tax credit since the said supply is a non-taxable supply. The give away promotional items which are distributed at the sole discretion of the Appellant without any contractual obligation or consideration, acquires the character of gifts and is blocked. The Advance ruling does not seem to be in line with the intention of the law to allow credit on sales promotion expenses which are incurred in course of business.

In this article, the paper writer has examined the sales promotion expenses incurred, the eligibility to avail credit on these expenses and the restricted credit on gifts.

ITC - Sales promotion vs gifts under GST

Analysis of concept of gifts vs sales promotion and eligibility to credit

Section 16 of GST Act gives conditions for availment of credit on goods/services used in course of business. Section 17(5) of the CGST Act sets out the blocked credit list. In section 17(5)(h), ITC shall not be available in respect of goods[moveable property] lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Such restriction to avail ITC is only on goods as gifts [not on services].

The term 'gift' has not been defined in the GST law, in which case we may look into definitions under other statutes. The Gift Tax Act has defined the word “gift” to mean transfer by one person to another of any existing moveable or immoveable property voluntarily and without consideration in money or money's worth.

The Supreme Court cited the definition of 'gift' from Corpus Juris Secundum, Volume 38 in Sonia Bhatia v. State of UP [1981] 2 SCC 585 as follows: A 'gift' is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. 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.

Australian High Court in the case of Commr of Taxation vs McPhail(1968 (41) AUR 346 held that to constitute a gift the property has to be transferred voluntarily and not as result of contractual obligation. In the said case person agreed to give donation to a school in return of school charging less fee for education of child of said person. Hence Court held that the donation cannot be termed as gift as made under contractual obligation to charge lower fee against donation made.

It can be concluded from above that gift is gratuitous and does not require consideration. Conversely if consideration is attached to any transaction, it cannot be called as gift. Love and affection maybe non-legal consideration in respect of a gift, but there cannot be monetary consideration for a gift. Further gift cannot arise under a contractual obligation.

ITC - Sales promotion vs gifts under GST


Section 17(5) itself starts with a non obstante clause, which means even if Section 16 allows the credit, as conditions for taking of credit are satisfied, but Section 17(5) shall block the credit in respect of certain cases. Moreover, Section 17 (5) is a specific provision. It is an established principle that specific provision prevail over general provisions. This doctrine has always been upheld. The cases on the subject would be found in the Third Edition of Maxwell which is 'generalia specialibus non derogant' - i.e. 'general provisions would not abrogate special provisions.'

If there is dispute between Section 16 and Section 17(5), then Section 17(5) over rides Section 16. In other words, if something qualifies for ITC under section 16 but is blocked from ITC under section 17(5) then ITC would not be available.


The intention which is behind the restriction given in Section 17(5)(h) seems to be that it tries to restrict people from giving benefits- in kind or in lieu of cash/ goods nomenclated as so called “gifts” to avoid levy of GST.

This can be distinguished from a situation wherein a business man may give branded diaries/calendars key chains, which are given for publicity, target based schemes where items such as fridge/TV etc are given as incentives under promotional schemes for distributors/retailers.

Whether such goods which are given can be said to be “gifts” or goods given which are related to business? The objective of giving such products is to increase the sales of the company wherein the customer is induced either to buy the products of the company or to buy it in larger quantity. Any prudent business man would recover the costs of such promotional items as part of sale price of products sold to customer, on which GST is paid.

It could be argued that the consideration is in the form of increased sales, when such supplies are done to unrelated persons. However, in the absence of measure of the consideration, levy fails.[held in CIT v. B. C. Srinivasa Setty, 128 ITR 294] When such promotional items are given to related persons[such as employee director of company] it maybe deemed to be supply, even when made without consideration [as per entry 2 to Schedule I to GST law].

The entry 1 in the schedule 1 of CGST Act provides that the permanent transfer or disposal of business assets on which ITC has been taken is treated as supply of goods even if made without consideration. Where the value of such goods have been included in the price of the main product, Schedule I may not be applicable.

When the goods are given as measure of sales promotion or are given for reaching certain sales/turnover targets, then it maybe said to be given “in course of business” and may not actually be “gifts” but given under contractual obligations. The input tax credit is eligible and can be availed on such goods given away for marketing/promotion to dealers by the supplier. Circular no. 92/11/2019-GST also provides, that ITC may be claimed where promotional items are given as combo offers and tax is treated to be paid on such goods as part of that combo.

However the supplier who avails credit on such goods given as sales promotion measure, has to document to establish why it is not gift, but promotional scheme as a contractual obligation. Also to ensure that PO to vendors to mention “sales promotion” items and similarly in the vendor invoices. The terms 'gift'/free sample/free/freebies” not to be used on any of the products/documentation. Account such expenses in the ledger head of brand promotion/ marketing sales promotion and expensed to P&L A/c. Such precautions ensure ITC is not denied at future date.


An additional aspect which may have to be seen is if the said goods are given as consideration[non-monetary] in exchange for the sales promotion/marketing services supplied by the distributor to the manufacturer. Further if the goods are given as barter against such supply of promotion services by dealer, then the manufacturer has to raise tax invoice charging GST on the goods given away and may avail corresponding credit as well.


In view of paper writer the credit on the sales promotion expenses cannot be denied. However the adequate precautions maybe taken to ensure that there is no dispute at future date from revenue including sending acknowledged letter to department setting out with reasons why eligible to credit and seek confirmation to ensure there are no sustainable demands for extended periods at future date citing suppression with intent to evade taxes.

The author can also be reached at roopa@hiregange.com

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Category GST, Other Articles by - CA Roopa Nayak