Challenging Case Studies.
In the backdrop of several promotional schemes being offered by companies to increase sales volume and to attract new customers for their products, a lot of ambiguities are arising with respect to the chargeability of GST and claiming of Input Tax Credit in relation to such business practices.
To ensure uniformity in the implementation of the law across the field formations certain clarifications are issued by CBIC vide Circular No. 92/11/2019- GST Dated 7th March, 2019 which are explained herein below :
(i) Free samples and gifts:
It is a common practice in various industries to provide free samples or gifts to their customers for promotion of new products. This practice is followed by pharmaceutical companies to provide drug samples to their stockists, dealers, medical practitioners, etc. For these free samples, no consideration is charged by the supplier.
Let us understand whether the above scheme should be considered as supply and the treatment of ITC, if any.
Section 7 of CGST Act, 2017, defines the term ‘supply’. An extract of the same is as below:
(1) For the purposes of this Act, the expression "supply" includes—
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed to be made without a consideration
As per Schedule I if such transactions are between related persons or distinct persons specified u/s 25, then the gifts/free samples given to such persons shall be treated as ‘supply’ even if it is without consideration.
Hence, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as “supply” under GST, except where the activity falls within the ambit of Schedule I of the said Act.
Further section 17(5)(h) of CGST Act states as below:
Input tax credit shall not be available in respect of the following, namely:—
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
Hence, it is also 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.
(ii) Buy One Get One Free Offer:
“Buy One Get One” scheme is used as a very common promotional technique for stock clearance as well as for publicity of new products mainly by the retail sector. For example, a tooth brush is given free on purchase of toothpaste.
This kind of transaction may look like a supply without consideration as it is termed as free of cost supply. However, this is not an individual supply, it is a case of two or more individual supplies where a single price is being charged for the entire supply. It can be best treated as supplying two goods for the price of one.
The ITC on Inputs, Input Services and Capital Goods used in relation to such supply shall be available.
(iii) Discounts including ‘Buy more, save more’ offers:
It is seen that sometimes suppliers provide staggered discounts where the discount rates increase with an increase in purchase price to their customers or some periodic or year ending discounts to their stockists etc.
Get 10 % discount for purchases above Rs. 5000/-,
20% discount for purchases above Rs. 10,000/-
and 30% discount for purchases above Rs. 20,000/-.
Get additional discount of 1% for purchases above 10000 pieces in a year,
get additional discount of 2% for purchases above 15000 pieces in a year.
Such discounts are shown on the invoice itself or 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 and generally at the year end. The year-end discounts are referred as volume discounts in common parlance and are passed to the customers through Credit Notes.
Such staggered and post supply discounts offered by the suppliers 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 CGST Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of documents issued by the supplier.
Also, 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.
(iv) Secondary Discounts:
These are the discounts which are not known at the time of supply or are offered after the supply is already over.
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.
Section 34 mentions the circumstances under which a credit note can be issued. An extract of the same is as follows:
Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed
Also, section 15 on Value of Supply mentions as follows:
(3)The value of the supply shall not include any discount which is given—
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if—
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
After combined reading of the above two sections, we can understand that discounts given after the supply has been effected and where there is no pre-determined agreement mentioning such kind of discounts would be given after the supply shall not be excluded from the value of supply.
In such a scenario, it is clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.
Such discounts shall not be excluded from the value of supply as the conditions of section 15(3)(b) are not satisfied.
There shall be no impact on availability or otherwise of ITC in the hands of supplier in this case.
To sum up the above a gist of all the promotional schemes is presented below:
There were multiple views about treatment under GST of such discounts or promotions, the above clarifications would put such disputes to rest and would help the industry to devise their sales promotions schemes in future accordingly.
CA Urjita Nagda
Asst.Manager - GST Compliance
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