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Impact of Goods & Services Tax on Gifts and Free Samples

  • Mar 19, 2020 | Viren Shah

The GST law has introduced the concept of ‘supply’ as a taxable event and done away with the erstwhile taxable events of manufacture, sale, service. The taxability and availability of Input Tax Credit (ITC) on gifts have always been a subject matter of discussion. 

The gifts are provided by the taxpayer for the purpose of advancement of its business or for sales promotion. The term gift is not defined under the GST law; thus, reliance could be placed on the definition provided under the Gift Tax Act, 1858.

As per Section 2(xii), the term ‘gift’ means the transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth.

The incidence of tax, under GST law, is on ‘supply’. The term ‘supply’, as defined under Section 7 of the CGST Act, 2017, includes all forms of supply such as sale, transfer, exchange, barter, made or agreed to be made for a consideration in the course of business. Further, as per Schedule I, GST shall be levied on the supplies made even without consideration between distinct or related persons. In other words, free supplies/gifts between unrelated persons are not supplies, therefore not taxable.

The provision relating to availability of ITC are provided in Section 17(5)(h) of CGST Act which states that notwithstanding anything contained in Sections 16(1) and 18(1) of CGST Act, ITC in respect of goods, destroyed, written off or disposed of by way of gift or free samples shall not be available. 

On a conjoint reading of Section 17(5)(h) of CGST Act and Schedule I, it indicates that if the goods are distributed as a gift, Section 17(5)(h) shall be applicable and accordingly, ITC of the same shall not be allowed. Thus, the goods shall not be considered as supply. 

In this regard, the AAR (Maharashtra) in the case of Sanofi India Limited (2019-VIL-176-AAR) had disallowed ITC on expenses incurred towards promotional schemes of a loyalty programme and goods given as brand reminders.

Further, the AAR (Karnataka) in the case of Surfa Coats India Private Limited had held that the taxpayer is not eligible to avail ITC on the inward supplies of goods and services given as incentives in the form of gifts of goods and services to its dealers. Moreover, the AAR observed that free travel services provided to its dealers without consideration would not qualify as ‘supply’. Accordingly, it held that the ITC on services procured for offering free trips is not available as it is similar to a gift.

It is to be noted that the Central Board of Indirect Taxes and Customs (CBIC) had earlier issued a clarification concerning the treatment of sales promotion schemes vide Circular No. 92/11/2019-GST dated March 7, 2019. The clarification stated that ITC should not be available to the extent used about goods or services provided as gifts/ free samples. However, the said Circular was later on withdrawn by the CBIC, citing numerous representations received expressing concerns on the legality of the said Circular.

Recently1 , the Gujarat High Court has issued notices to the CBIC and revenue authorities in response to writ petition filed by various taxpayers for denying ITC on gifts/free samples given to their customers and clients. 

Considering the anomaly on the matter, the CBIC should provide the necessary clarification.

To understand how Avalara can help you with GST compliance, visit www.avalara.com

1Press news published on 22 February 2020

Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Viren Shah
Avalara Author Viren Shah
Viren Shah, a member of the Institute of Chartered Accountants of India and a Bachelor of Commerce from Mumbai University, has experience of more than a decade in Corporate and International Taxation. He specializes in Domestic and International Taxation, with specific emphasis on cross border transactions and exchange control laws with respect to inbound and outbound investments. He has vast experience in advising companies across various industries.

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