Introduction 

Ever thought about why you pay Rs.5 for a chips packet while its manufacturing and transportation cost is less than Rs.2.5 or you pay Rs.40 for a cold drink despite having a manufacturing and transportation charge of less than Rs.30? Or how the government earns despite spending such a huge amount on development. Here comes the taxes. Taxes have long been the primary source of income for governments, dynasties, and monarchies, evolving. In India, GST (Goods and Services Tax) now governs taxes. GST has been the game changer in the Indian taxation system.

Some important changes are as under

• Increase in GDP: It is estimated that GST has increased India’s GDP by around 1-2%. 
• Reduction in inflation: GST has been helpful in the reduction of inflation by almost 0.5-1%. 
• Increase in employment: GST has created millions of jobs, increasing employment.

Read more: Presumptive Income Taxation Scheme for Business and Professionals

The below figure shows the GST revenue per year:

Year	GST Revenue (₹ crore)
2017-18	7,19,078
2018-19	11,77,377
2019-20	12,22,117
2020-21	11,36,803
2021-22	14,76,000
2022-23	18,10,000

Source:- https://pib.gov.in/PressReleasePage.aspx?PRID=1912850#:~:text=The%20total%20gross%20collection%20for,higher%20than%20that%20last%20year

Before GST, one of the loopholes in the INDIAN tax system was cascading of taxes or tax on tax. Assume that product A is adjusted to become product B, and then product C, before being sold to customers Every step of the process, for example, involves someone paying 10% in taxes at A, 10% in taxes at B (which includes the 10% tax value paid by A), and 10% in taxes at the end, which includes taxes paid by both A and B by the customer. As a result, many taxes were imposed, including on taxed value. This is the cascading of taxes. To overcome this issue we stepped into the world of GST (Goods and Services Tax), a type of ad valorem tax. GST was the 101st amendment of the INDIAN Constitution. Thus from now products will only be taxed at the end of the production or C, for the rest of the stops in manufacturing i.e.… A and B,  the taxes will be returned in the form of ITC (Input Tax Credits). Thus, ITC refers to the tax already paid by a person at the time of purchase of goods and services and which is available as a deduction from tax payable.

According to Section 17(5)(h) of CGST Act 2017, ITC is not available with respect to the following:

Goods lost, stolen, destroyed, written or disposed of by way of gift or free sample. Though gift has not been defined under the GST Act, we find its definition under other laws like the Transfer Property Act, of 1882, defining free Gifts are certain existing movable or immovable property made voluntarily and without consideration by one person, who is called the donor, to another person, who is called the donee, and accepted by or on behalf of the donee. Therefore, a company cannot claim ITC on the purchase of goods distributed as gifts or free samples, as they do not meet the supply criteria under GST.

ITC eligibility for free gifts in GST

According to the Central Board of Indirect Taxes and Customs (CBIC), gifts up to a value of Rs 50,000 per year by an employer to his employee are outside the ambit of GST as they do not meet supply chain criteria. Gifts worth more than ₹50,000 made without any consideration. Then, GST will be applied if they are in the course of business.

• During Diwali, two companies, A and B, are distributing gifts to their employees. A distributes dinner sets to its employees, and B distributes gold coins to them. The total cost for A is 49,000 INR, while for B is 2,20,000 INR.  In the end, B will be subject to the GST, and A will not be subject to any taxes.
• If you run a company, understanding ITC is crucial both financially and legally.
• Though these restrictions oppose GST’s goal of a fair and simple tax system, they address exceptions like personal motives.

Read more: Input Tax Credit (ITC) on Food and Beverages Under GST

Conditions for claiming ITC on giveaways.

As we saw above, suppliers cannot claim ITC for goods given as gifts or giveaways. You must carefully examine the provisions related to the taxability of gifts and free samples under GST to ensure compliance and avoid future litigation because these conditions also change based on the agreement. One key aspect of claiming ITC is that businesses must use the credit for business purposes and in the course of business activities. You must never see ITC only as a way to manage tax liability, but record keeping is one of the crucial steps in this. Record-keeping and adherence to regulatory requirements, contributing to overall financial transparency and compliance for businesses operating under the GST regime.

Also Read: What Are The Requirements For Claiming ITC On Free Gifts?

Documenting ITC on promotional gifts

Let’s suppose you are running a toothbrush company. As a part of a marketing campaign, you decided to sell a 10Rs toothpaste free with a 40Rs toothbrush. The key point is that toothpaste is not a free gift, but a part of sales promotion or marketing strategy. Since this is a case of sale promotion and not a free gift or sample, you will be able to claim ITC on procurement of this item.  Under GST ITC promotional gifts come with different terms and conditions. 

• It is very crucial for businesses to explain and document why the promotional items are not gifts but part of a contractual obligation to ensure that ITC is not denied at a future date.
• The terms “gift,” “free sample,” or “freebies” should not be used on any products or documentation, and expenses should be accounted for in the ledger head of brand promotion, marketing, or sales promotion to support the ITC claim

Thus before making it as a part of a promotional item you must first be ready with an answer of why it is not a free sample or gift and why it is a promotional item to adhere to guidelines and laws.

Also Read: What Information Do You Need To Report ITC?

GST credit rules on free items

GST credit rules are the rules that govern the eligibility of ITC under GST. They provide the condition under which businesses can claim taxes paid while producing goods and services. Many factors need to be considered when discussing credits in GST, such as proper documentation, ITC restrictions, credit transfers, and verification of claims. Credit rules for free items are defined under Section 17(5)(h) of the GST Act. The restriction on claiming Input Tax Credit (ITC) on free items aims to prevent misuse of the credit system and ensure that ITC is only available for goods and services used for furtherance of business activities. Moreover, To avoid any dispute with tax authorities, you must have a clear vision and knowledge of GST rules regarding free items.

Read more: Examples of Marketing Expenses for ITC Claims

Maximizing ITC on gift expenses

Maximizing ITC is one of the crucial parts of reducing tax liability. Moreover, there are many ways by which we can maximize our ITC on gift expenses: 

• For business 

The basic context behind the gift should be the profit of the business and also used in the course or furtherance of business activities.

• Record keeping: 

Documents are one of the foundational units in tax claims. ITC also requires proper documentation for claims throughout the year, especially during audits.

• Monetary limits 

Adherence to the Rs.50,000 limit per financial year makes gifts under ITC, thus a tax reduction.

• Consultancy

Taking advice from a consultant or consultancy or anyone expert in the field of taxation will surely help in maximizing the ITC.

Compliance guidelines for ITC on free gifts:

The compliance guidelines for claiming Input Tax Credit (ITC) on gift expenses under the Goods and Services Tax (GST) regime are crucial for your business to ensure adherence to the regulations. Certain key things to be taken note of are as follows:- 

• Distinction between Sales Promotion and Gifts 

It is very important to distinguish between gifts and promotional stuff. Businesses consider goods given for sales promotion or meeting sales targets as ‘in the course of business,’ not gifts.

• Restrictions on ITC for Gifts

You must keep a financial limit to keep the gift under the ITC’s radar.

• CBIC Circular

The Central Board of Indirect Taxes and Customs (CBIC) issued a circular clarifying that suppliers cannot claim ITC on inputs, input services, and capital goods used for gifts or free samples distributed without any consideration.

Conclusion

To ensure a smooth flow of revenue and prevent taxation, GST has been a game changer not only for governments but also for businesses. Additionally, transparency and fairness are one of the foundation features of GST and these two are the reason behind keeping free gifts out of ITC. This also helps the government to reduce revenue leakages and fraudulent activities. Also, ensuring a smooth flow between businesses and tax authorities, clear and transparent tax laws will act as a grease to the friction between businesses and tax authorities. But three ingredients grease that process: maintaining proper documentation, providing a valid reason for categorizing the product as a promotional item rather than a gift or sample, seeking professional advice, and many more on the list. Finally, we can say that the government keeps free gifts out of the purview of ITC to reflect its efforts to create a transparent and accountable tax environment, where businesses must accurately report their transactions and adhere to the prescribed guidelines for claiming ITC.

Also Read: How to claim ITC on capital goods? Also Listen: How to create E-way Bill With CaptainBiz

Frequently Asked Questions

• What are ITC in GST?

Under GST ITC, businesses use promotional items to boost promotion and drive sales.

• Can you claim ITC on free gifts

Section 17(5)(h) of the GST Act prohibits ITC claims on free gifts.  Moreover, CIBC provides gifts for under Rs.50,000 within ITC.

• What are free gifts?

The Transfer of Property Act of 1882 defines free gifts as certain existing movable or immovable property given voluntarily and without consideration by one person, called the donor, to another person, called the donee, and accepted by or on behalf of the donee.

• What are promotional gifts?

Under GST ITC, businesses use promotional items to promote their operations and increase sales.

• What is the basic difference between free gifts and promotional items?

Free gifts don’t qualify for ITC unless under ₹50,000/year; promotional items do if for business purposes.

• Who governs GST or ITC guidelines?

GST council is responsible for governing GST guidelines.

• Does the ‘buy one, get one’ offer count as a free gift?

No, it is part of promotional items and also can be claimed under ITC.

• What are the types of GST?

There are three main types of GST: CGST(Central GST), GST(State GST), and IGST(Inter-State GST).

• What is the limit of ITC on free gifts?

Businesses can include gifts below Rs. 50,000 per annum under the ITC, but gifts above this amount are not covered by ITC.

• Is there any way to convert a free gift into a promotional item for ITC?

Not really. The purpose of the gift is crucial. Additionally, You can’t simply change the label to claim ITC.