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 always been the biggest source of income for governments or dynasties or monarchies since ancient times, despite having changed in forms. In India, taxes are now governed under GST(Goods and Services Tax). 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: Millions of jobs have been created due to GST.
The below figure shows the GST revenue per year:
|GST Revenue (₹ crore)
Before GST, one of the loopholes in the INDIAN tax system was cascading of taxes or tax on tax. Assume for the moment that product A undergoes adjustments to become a 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. Those gifts which are worth more than ₹50,000 and are made without any consideration. Then GST will be applied if they are in the course of business.
Suppose it’s the month of Diwali and there are two companies A and B in the process of distributing Diwali gifts to their employees. A distributes dinner sets to its employees and B distributes gold coins to its employees. 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 not be subject to any taxes.
If you are running a company then understanding different aspects of ITC is very crucial, not only financially but also legally.
Though these restrictions are against the main objective of GST, which aims to ensure a fair and simple tax system but are implemented due to some exceptions like the motive which can find its way to personal reasons.
Conditions for claiming ITC on giveaways.
As we saw above ITC are not available for suppliers of goods that are made 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 climbing ITC is the credit must be used for business purposes and in the course or furtherance 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.
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 point to be noted here 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 during the production of goods and services. There are many things to be kept in mind while talking about credits in GST like proper documentation, restrictions on ITC, transfer of credits, verification of ITC claims etc. For free items credit rules 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 availed on goods and services used for furtherance of business activities. To avoid any dispute with tax authorities you must have a clear vision and a clear knowledge of GST rules regarding free items.
Maximizing ITC on gift expenses
Maximizing ITC is one of the crucial parts of reducing tax liability. There are many ways by which we can maximize our ITC on gift expenses:
The basic context behind the gift should be the profit of business and used in the course or furtherance of business activities.
Documents are one of the foundational units in tax claims. ITC requires proper documentation for claims throughout the year, especially during audits.
Adherence to the Rs.50,000 limit per financial year makes gifts under ITC thus a tax reduction.
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 below:-
Distinction between Sales Promotion and Gifts
It is very important to make a distinction between gifts and promotional stuff. When goods are given as a measure of sales promotion or for reaching certain sales/turnover targets, they may be considered as given “in the course of business” and not as gifts.
Restrictions on ITC for Gifts
A financial limit must be kept to keep the gift under the ITC’s radar.
The Central Board of Indirect Taxes and Customs (CBIC) has issued a circular clarifying that ITC shall not be available to the supplier on the inputs, input services, and capital goods to the extent they are used in relation to gifts or free samples distributed without any consideration.
To ensure a smooth flow of revenue and prevent taxation, GST has been a game changer not only for governments but also for businesses. 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 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 there are three ingredients to that grease having proper documentation, proper reason behind why the product is kept under the proportional item rather than a gift or sample, taking professional advice and many more on the list.
Finally, we can say that keeping free gifts out of the purview of ITC reflects the government’s efforts to create a transparent and accountable tax environment, where businesses are required to accurately report their transactions and adhere to the prescribed guidelines for claiming ITC.
Also Read: How to claim ITC on capital goods?
Frequently Asked Questions
What are ITC in GST?
Input tax credit 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.
Can you claim ITC on free gifts
Section 17(5)(h) of the GST Act prohibits ITC claims on free gifts. But CIBC provision rules gifts under Rs.50,000 within ITC.
What are free gifts?
Transfer Property Act, of 1882, defines 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.
What are promotional gifts?
Promotional items in the context of Input Tax Credit (ITC) under GST refer to goods that are used to promote a business and generate sales.
What is the basic difference between free gifts and promotional items?
Free gifts are not under ITC (except if the value is under 50000Rs per annum), while promotional items are under ITC(validating condition they are for business purposes)
Who governs GST or ITC guidelines?
GST council is responsible for governing guidelines for GST.
Does buy one get one come under free gifts?
No, it is part of promotional items and can be claimed under ITC.
What are the types of GST?
There are mainly three types of GST: CGST(Central GST), GST(State GST) and IGST(Inter-State GST).
What is the limit of ITC on free gifts?
Gifts below Rs.50000 per annum are included under the ITC but above them are not under the purview of 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. You can’t simply change the label to claim ITC.