Taxability on Sales promotion activity is a major challenge in GST . Lets discuss various schemes and there impact on GST liability.
There are several promotional schemes which are offered by taxable persons to increase sales volume and to attract new customers for their products. Some of these schemes have been examined and clarification on the aspects of taxability, valuation, availability of ITC in the hands of the supplier in relation to the said schemes is detailed hereunder:
- FREE SAMPLES AND GIFTS :
- Free samples and gifts given free of cost will not be treated as supplies unless it falls within Schedule I (Supplies without consideration).
- If the activity does not fall within Schedule I, ITC in respect of inputs, input services and capital goods will not be available to the extent they are used in relation to the gifts or free samples distributed without any consideration.
- Where the activity falls within supply as per Schedule I, the supplier would be eligible to avail of the ITC.
Brief Comments :
- This clarifies the position that there cannot be a double whammy to any registered person. If there is a supply without consideration involved, ITC reversal is not required. Only if there is no supply involved, ITC is required to be reversed.
- However, it must be clear whether supply is involved or not. If a supply is involved but is not shown, then mere ITC reversal may not be sufficient. Also, if there is no supply involved but is disclosed as a supply incorrectly, ITC may still be required to be reversed.
- BUY ONE GET ONE OFFER :
- It may appear at first glance that in case of offers like “Buy One, Get One Free”, one item is being “supplied free of cost” without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply.
- Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply (i.e. whether they are naturally bundled or not).
- It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.
- This establishes the principle that nothing is free in this world
- If two or more items are naturally bundled, the rate of the principal supply will be taken (being a composite supply).
- If it is not naturally bundled, the highest rate out of all the supplies will be adopted (being a mixed supply).
- This should discourage businesses to club supplies which are not naturally bundled particularly wherein the ‘free item ’is attracting a higher tax rate. This is because it will result in the entire supply being taxed at a higher rate.
- Further, the fact that there is no ITC reversal involved comes as a huge welcome relief for the industry wherein provision of free items is part of their regular supply policies
- DISCOUNTS INCLUDING ‘BUY MORE, SAVE MORE’ OFFERS :
- Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume). For example- Get 10 % discount for purchases above Rs. 5000/-. Such discounts are shown on the invoice itself.
- Some suppliers also offer periodic / year ending discounts / volume discount to their stockists, etc. For example- Get additional discount of 1% if you purchase 10000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected. Such discounts are passed on by the supplier through credit notes.
- It is clarified that such discounts offered will be reduced from the total value of supply for charging GST. However, the recipient should reverse the ITC in respect of the portion of the discount reduced.
- Supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts
- The industry has been issuing credit notes without GST because of lack of clarity regarding the nature of discounts on which the reduction of GST is allowed
- This clarifies the position that where the discounts are established as per the agreement, then the same is allowed to be reduced from the total value in case of staggered/periodic/year end/volume discounts.
- This will provide certainty to the industry as to when credit notes with/without GST should be issued in case of discounts.
- SECONDARY DISCOUNTS :
- These are the discounts which are not known at the time of supply or are offered after the supply is already over.
- For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet
- It is hereby clarified that financial / commercial credit note (without charging GST) will be issued by the supplier since the conditions for post supply discount is not satisfied.
- This discount will not be reduced while determining the value of supply by the supplier.
- There is no impact on availability or otherwise of ITC in the hands of supplier in this case i.e. the supplier can take the entire ITC
- Quite a few players in the industry had been issuing credit notes with GST showing the same as a valuation difference in terms of Section 34even though the conditions of post supply discount were not satisfied.
- This brings clarity that the satisfaction of the condition of post supply discount is pertinent even though the same is shown as a downward valuation difference
- The biggest welcome relief is the clarification that ITC is not to be reversed by the recipient when commercial credit note is issued by the supplier.