ITC on Marketing Expense/ Sales Promotional Schemes

ITC on Marketing Expense/ Sales Promotional Schemes

What is the importance of common credit?

• Input Tax Credit is only available for commercial use. Many traders use the same inputs for business and personal purposes. Input credits for GST paid on personal costs are not available to taxpayers. Again, goods that are excluded from GST already have a 0% tax rate. Inputs utilised in such exempted goods cannot be claimed for ITC because this would result in negative taxation. As a result, ITC on inputs for exempted goods will have to be eliminated as well.
• The following will assist you in calculating common credit for personal and exempted supplies, leaving only the portion that corresponds to taxable supplies to be calculated. When you file your GST returns, you will have an amount that you are qualified to claim as an Input Tax Credit . The credit that is attributable to personal supplies & exempted supplies must be reversed in GSTR-2.

Will you get Input Tax Credit for Marketing Expense?

• We write to you between a lot of shock and surprise after the judgment of the Appellate Authority of Advance Ruling, Karnataka, in the case involving Page Industries Ltd. The judgment restricts the Business from availing Input Tax Credit in promotional items, which will directly result in an increase in cost for customers.
• The Business community is looking for clarifications without which there is a fear of increasing prices in the market, which is the last thing people would want in the present pandemic situation.

About the Page Industries Ltd. Ruling

• If you have no idea about the ruling that we are discussing, here is a quick explanation of the situation:
• It is a common practice for companies to give promotional items like Carry Bags, Pens, Calendars with the company’s branding to dealers.
• The Advance Ruling Authority says that since the dealer is not taken into consideration, this delivery of promotional items will be considered as a supply. This delivery also does not attract Schedule I as the dealer is not a related party. The promotional items are also not assets because their record is maintained in the Profit and Loss account.
• Therefore, the promotional items are to be considered as Non-Taxable supply. GST payment has to be made for these items, but Input Tax Credit, as per Section 17(2), cannot be asked for.
• Surprisingly, there have been no discussions about the definition of Non-Taxable Supply, which defines the supply of goods or services or both, which is not leviable to taxes.

Is the Transaction supposed to be considered as a Supply or not?

• The first thing to understand is whether this transaction is to be considered a supply or not!
• The transaction can be termed as Non-Taxable supply only when it falls under the definition of a supply. As the ruling defines, the transaction is not a supply, then how can we term it as a Non Taxable supply?
• Not only this, but when we look into the basic definitions, we get to know that Input Tax Credit can be applied in cases where particular goods or services are used for Business functions. The Honorable Supreme Court has also mentioned the same in the case involving Coca-Cola during the pre-GST era.
• Sales promotions are also part of Business functions. Activities by companies like distributions of promotional items directly result in increased Business and sales. This fuels growth and allows the companies to pay more GST with growing sales.

“What should you do if you find yourself in this situation?”

• If you are faced with such a situation, you must make efforts to explain the scenario to the Officer.
• You must explain that the distribution of promotional items is not done randomly but is done only to particular dealers who sell the goods or services of your company. The dealer will also give the carry bag only to customers who buy goods from your company and not randomly.
• This cannot be considered as a gift because a gift involves no obligations and is given without any intentions in mind. However, in this case, the carry bags are only given to contribute to the company’s increased sales.

The Case of Baglekar Akash Kumar involving Carry Bags

• We can get more information about this matter by checking the case involving Baglekar Akash Kumar in the District Consumer Dispute Redressal Commission, Hyderabad.
• This case mentions that the customer is actually a walking advertising agent for a company and charging him/her for the carry bag is an unfair trade practice by Businesses.
• When the customer does not pay for the bags and these will obviously not be sold otherwise, it will result in increased prices. Do it one way or the other; the customer will always have to bear the expense of the bag.
• Because of this, we sincerely believe that every company must get Input Tax Credit for all the spendings on promotional items.
• Not giving the Input Tax Credit will result in increased pricing, which is not a favourable scenario for anyone at the moment.

AAR’s Judgments

The Hon’ble AAR, relying on Section 17(5)(h) of the Central GST Act, which states that “input credit shall not be available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples,” treated the scheme as a “gift” and held that input tax credit on gifts will not be available if no GST is paid on their disposal.

The applicant is not required to supply gold coins under any contractual duty, according to the AAR, because no contract/agreement has been signed by clients in writing accepting the applicant’s program. As a result, the applicant freely gives the gold coins in exchange for the fulfillment of specific conditions.

c The Latest Circular of the CBIC of Input Tax Credit in conjunction with sales promotion schemes

Circular No. 92/11/2019-GST issued by the Central Board of Indirect Taxes and Customs (CBIC) The status surrounding the availability of Input Tax Credit in conjunction with sales promotion schemes under GST has been clarified in a letter dated March 7, 2019. Taxable persons use these promotional plans to improve sales volume and attract new clients for their products. The following is a brief summary of explanations regarding the availability of ITC on such schemes as per the aforementioned circular: –

 

Sr. No.	Nature of promotional offer	Description	Input Tax Credit(ITC)
1.	Free of cost Gift & samples	For example, distributing medication samples to pharmacies, dealers, doctors, and other healthcare professionals without charge.	No Input Tax Credit will be available under section 17(5)(h). However, ITC will be available in case transactions are covered in Schedule I.
2.	Purchases 1 get 1 free offer	“Buy one soap and get one free,” for example, or “Get one toothbrush free with the purchase of toothpaste.”	Input Tax Credit shall be available.
3.	Discounts including ‘Purchases  more, save more offers	I Discounts that are displayed on the invoice itself. For example, if you spend more than Rs.5000, you’ll get a 10% discount, a 20% discount if you spend more than Rs.10,000, and a 30% discount if you spend more than Rs.20,000. (ii) In cases when the supplier passes on such discounts through credit notes. For example, if you purchase 10,000 pieces in a year, you will receive a 1% more discount; if you purchase 15000 pieces in a year, you will receive a 2% additional discount.	Input Tax Credit shall be available.
4.	Secondary Discounts	For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs.10/- per packet. Afterward M/s A re-values it at Rs.9/- per packet. Subsequently, M/s A issues a credit note to M/s B for Rs.1/- per packet.	Input Tax Credit shall be available.

As above explained in the table the Input Tax Credit would be available in the case of various sales promotional schemes as cited above, However, in the case of the distribution of “gifts” or “free samples,” the same does not apply.

In light of the foregoing, the circular has resolved the concerns to a considerable part and has shortened the litigation in relation to the ITC in connection with various sales promotional programs, as indicated above. However, because “without consideration” and “gift” are such broad terms, the distribution of “gifts” or “free samples” will remain a murky area. Furthermore, based on the aforementioned CBIC circular, the tax authorities will deny the ITC for the same, and commercial organizations may continue to claim the same as genuine ‘business marketing expense   .’

More reads: Reasons for the Movement of Goods under the GST

What is Eligibility of ITC Credit under Goods and Services Tax Law ?

• Input Tax Credit can be claimed on goods or services used for business purposes only, provided the Goods and Services Tax taxpayer is in possession of a tax invoice and the tax charged has been paid to the Indian Govt.
• ITC is a mechanism in the Goods and Services Tax system that allows registered taxpayers to reduce the taxes they owe on their sales (output tax) by the amount of tax they have paid on their purchases (input tax).
• The Goods and Services Tax taxpayer must have a valid tax invoice or debit note issued by a Goods and Services Tax registered supplier, & Goods and Services Tax charged on such invoice must have been actually paid to Indian govt.
• To be eligible for Input Tax Credit, the taxpayer must ensure that Goods or services are used for purpose of their business & not for personal use.
• Moreover that Goods and Services Tax taxpayer must file the relevant Goods and Services Tax returns, such as GSTR-3B, where the ITC is claimed.

Few Goods & Service which are not eligible for ITC

S.No.	Items	Exceptions
1	Foods, Outdoor Catering, Beauty Treatment, Health Services Cosmetic, Plastic Surgery	Except where an inward supply of goods or services or both of a particular category is consumed by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply
2	Rent-a-cab, Life Insurance, Health Insurance	The Government states the services which are Compulsory for an employer to provide to its employees under any law for the time being in force; or Such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply.
3	Motor Vehicles	Except in cases – Transportation of passengers or  Extended supply of such vehicles or conveyances;
4	Other Conveyances	·  Providing training on driving, navigating such vehicles or ·  Conveyances for transportation of goods;
5	Goods or services or both on which tax has been paid under section 10;	composition scheme  as per u/s 10
6	Goods or services or both received by a taxable person for construction of an immovable property	Except goods or services received on his own account including when such goods or services or both are used in the course or furtherance of business and plant and machinery
7	Works contract services when supplied for construction of an immovable property	Except where it is an input service for the extended supply of works contract service and plant and machinery
8	Goods or services or both received by a non-resident taxable person	Except on goods imported by him
9	Any tax paid in accordance with the provisions of sections 74, 129, and 130.	In Fraud, Misstatement, etc.
10	Membership of a Club,	–
11	Membership of a Health Centre	–
12	Travel benefits on home travel concession	–
13	Goods written off	–
14	Travel benefits extended to employees on vacation such as leave	–
15	Goods stolen	–
16	Goods disposed of by way of gift or free samples	–
17	Goods or services or both used for personal consumption	–
18	Goods lost	–
19	Goods destroyed	–
20	Membership of a Fitness Centre;	–

Big Question is arise on ITC : In case any person is engaged in supply of taxable as well as exempted goods. Whether he would be entitled to claim entire ITC Credit of the taxes paid on Goods or Services?

Ans : In case any person is engaged in supply of taxable as well as exempted goods, then he would be eligible to claim ITC on proportionate basis as per the provisions of Section 17 read with Rule 42 & Rule 43 of the Central Goods and Services Tax (CGST) Rules, 2017.