Sales Promotion Schemes and GST
By Dinesh Sharma
Sales promotion is a set of marketing techniques aimed to stimulate the demand in particular products and increase brand awareness. Limited in time, it creates a feeling of time-sensitiveness, generates new leads, and keeps existing customers engaged.
Types of Sales Promotions:
1. Give Away/ Free Samples/ Gifts;
2. Bonus-pack deal / Buy one get one offer;
3. Price discount on quantity / Cash discount;
Give Away/ Free Samples/ Gifts:
Giving out free samples to influencers is a way to gain a lot of customers quickly because you effectively get your product or service marketed to your exact target audience. Influencers having good follower reach on social media tell their followers about what they got for free and explain in detail about the product. They show the product to other people who then also buy the item and spread the word.
Types of Free Samples:
1. Free Samples to Influencers for advertising on their social media pages; &
2. Loyalty gifts to regular customers.
Tax Liability on Free Samples:
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.
Therefore, free supplies/gifts between unrelated persons are not supplies, and are not taxable.
Input Tax Credit on Free Samples:
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. Thus, ITC is not available on the goods purchased which are later distributed as free samples.
Any ITC availed earlier on purchase of such goods has to be reversed immediately in the period of distributing such free samples.
Bonus-pack deal:
Businesses often offer an extra quantity for free when buying more quantity. This creates a sense of urgency in customers pushing them to buy quick as these are mostly limited period offers. 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. It can at best be treated as supplying two goods for the price of one.
Types of Bonus-pack deal:
1. Free quantity offers like — BOGO (Buy one get one), Buy 2 get 1 free; or Buy 3 get 2 Free;
2. Bundled free products like — Buy a toothpaste and get toothbrush free; buy laptop laptop and additional accessories / extended warranties are free warranty etc.
Tax Liability on Bonus-pack deals
Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.
Input Tax Credit on Bonus-pack deals:
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 Bonus-pack deals.
Discounts including ‘Buy more, save more’ offers:
Businesses offer discounts on bulk purchases. The discount percentage increases with the increase in the volume of order/purchase. Sometimes the customers (B2B) also get cash discounts when the amount is paid in full at the time of purchase.
Tax Liability on Discounts
The discounts offered by businesses in such cases shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub-section (3) of section 15 of the said CGST Act, including the reversal of ITC by the Customer of the supply as is attributable to the discount on the basis of credit notes issued by the supplier.
Input Tax Credit on Discounts:
The 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.
Case Laws:
1. 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.
2. 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.
Information in this blog is intended to provide only a general outline of the subjects covered It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice.
Nitin Jogad & Associates| Chartered Accountants accept no responsibility for loss arising from any action taken or not taken by anyone using this blog.
