Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Monday, March 11, 2019

Input Tax Credit (ITC) in case of Sales Promotion Activities

The GST Department has recently offered great relief to the FMCG industry by clarifying on a few matters with respect to supply of free articles under schemes such as "Buy One, Get One", where ITC was not being allowed in proportion to the free supplies made by such companies.

The details are as follows.

A. Free Sample and Gifts (No ITC): 

It is a common practice in trade and industry, such as, garment industries which often provide free sample or gifts to increase sales volume and to attract customers without any consideration.

According to section 7(1)(a) of said Act, supply made without any consideration shall be not treated as supply under GST (except in case of activities mentioned in Schedule I of the said Act).

It is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.

However, where the activity of distribution of gifts or free samples falls within the scope of ‘supply’ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.

B. Buy One Get One Free Offer (ITC Available):

Offers like ‘buy one soap and get one free’, are actually not an individual supply of free goods but a case where a single price is charged for two or more individual supplies. Taxability of such supply will be dependent upon 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.

It is also clarified that ITC shall be available to the supplier for the inputs, input service and capital goods used in relation to supply of goods or service or both as part of such offers.

C. Discounts on the Face of Invoice or Pre-determined (Reduced from Taxable Value):

Sometimes, suppliers give discounts which increase with the increase in purchase volume. For example, 10% discount on purchase of more than Rs. 5000 and 15% discount on purchase of more than Rs. 10000. Such discounts are often given in the invoice itself.

Suppliers also give periodic discounts, generally at end of the season or at the year end. The discounted amount would be excluded to determine the value of supply. Such discounts are passed by the supplier by issuing credit notes.

It has been clarified in this regard that ITC shall be available to the supplier for the inputs, input service and capital goods used in relation to supply of goods or service or both as part of such offers.

D. Secondary Discount (Not Deducted from Taxable Value):

When discount is provided after sale it is termed as secondary discount. 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.

Discounts in cases such as these do not fulfill the conditions laid out in section 15(3)(b) of the Act. It has been clarified in this regard that financial / commercial credit notes can be issued by the supplier even if they don’t fulfill the conditions under the aforementioned section, i.e. credit notes can be issued as a commercial transaction between two contracting parties.

It is also clarified that such secondary discounts shall not be excluded while determining the value of supply since they are not known at the time of supply, and there is no impact on availability or otherwise of ITC in the hands of supplier in this case.

Compiled by:

Shivam Tiwari
Articled Assistant
GST Team
Sandeep Ahuja & Co.


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