Introduction

Customers are the king, and companies take care of their customers. They keep on employing various strategies to impress customers and build better relationships. One such common practice we find among companies is the distribution of free gifts and complimentary items. But here comes the big confusion. Promotional activities in the business raise the question of whether businesses can claim input tax credit (ITC) on these giveaways from a taxation point of view. In this blog, we will understand in detail the intricacies revolving around claiming ITC on free gifts, the eligibility criteria, documentation requirements and strategies for successful claims.

Tabulated Chart of Impact of GST on goods given as free samples/gifts for business promotion

No.	Scenario	GST Impact
1	Buy ‘some’ get ‘some’ free	GST is payable on the price charged to the customer. ITC on inputs is available.
2.	Buy One product and get another free	If both products are related, then the seller can charge GST based on the transaction value of the dominant product. If both the products are not related then the seller needs to charge the highest rate of GST applicable on the transaction value.
3.	Free Samples given to distributors of products manufactured by the company	The products are given without consideration and hence they qualify for free samples/free gifts. The company won’t be able to claim ITC due to restrictions by section 17(5)(h)
4.	Gold coins, outstation trips and home appliances are given to distributors under the incentive scheme	ITC is not available to the company on purchase of such goods. A company also doesn’t have to pay any GST on goods distributed as gifts.
5.	Gift by employer to employee	If a gift of value not more than ₹50,000 is given per employee in a fiscal year, the business reverses the ITC. If the value exceeds ₹50,000 per employee, then the employer needs to pay Output GST and he is also eligible for ITC

Reference: – https://incorpadvisory.in/blog/impact-of-gst-on-goods-given-as-free-samples-gifts-or-business-promotion/

ITC eligibility criteria for free gifts

If you are into business then you should try to understand the eligibility criteria for claiming Input Tax Credit (ITC) on free gifts. Because free gifts are an important part of promotional activities organised by the companies. As a businessman, one should know how the tax can be reduced by being eligible for free gifts under ITC. Here are certain key criteria for claiming ITC on free gifts such as:

• Registration Status Under GST

One of the main aspects of ITC eligibility for free gifts is the registration status of the recipient under the GST regime. Additionally, only those businesses that are registered under the GST are eligible to get the benefit of Input tax credit.

• Utilization in Business Activities

Another important criterion for ITC eligibility is that the free gifts distributed shall be in the regular course of business activities. There has to be a direct link between the complimentary items and the economic pursuits of the enterprise. Moreover, the free gifts that are used must be an integral part of the business and should be able to enhance the business’ operations.

• Meticulous Documentation

Documentation is very important to claim ITC. This applies to free gifts also. In addition, transactions that involve complimentary items shall be recorded meticulously to meet the standards of GST compliance. Moreover, the record represents the tangible proof of the genuine business purpose behind the distribution of gifts.

• Separate Record-Keeping for Free Items

Businesses need to maintain a separate record for free items to successfully claim ITC. This ensures transparency during audits, revealing that the business is committed to compliance.

• Inclusion in Turnover Calculation

Those businesses that want to seek ITC claims on free gifts shall include the value of these items in the turnover calculation. Moreover, this ensures that the activity is legitimate and helps get an ITC claim.

Documenting ITC on complimentary items

Documentation plays an important role in claiming ITC on complimentary items. Businesses shall properly record each transaction involving complimentary items to meet GST compliance. Let’s understand some basic documentation required to claim ITC on complimentary items.

• Detailed and Transparent Invoices

When we talk about documenting ITC on complimentary items the first thing that needs to be done is detailed and transparent invoice preparation. Whether you are providing a free sample or promotional merchandise your invoice shall have a clear mention of the same. The invoice shall mention the nature of the complimentary item, its value, and the details that justify the connection to the business activities. A well-crafted invoice helps tax authorities to validate the ITC claims.

• Record-Keeping for Audit Trail

Proper record-keeping of complimentary items can be very beneficial in the long run. This separate record works as a dedicated audit trail for transactions revolving around complimentary items. The dedicated record keeping for complimentary items streamlines the documentation process as well as reveals the commitment to compliance.

• Linking Complementary Items to Business Use

One of the crucial aspects of documenting the ITC on complimentary items is developing a clear link between the free items and their intended use in the business.  This linkage plays a major role in demonstrating that the items distributed as gifts are integral and will leverage the business.

• Technology-Driven Solution

Making use of a technology-driven solution can increase the accuracy and efficiency of documenting the ITC on complimentary items. The company shall install good accounting software integrated with GST reporting.  This will reduce the human errors and minimize the discrepancies. This will lead to the accuracy required for GST compliance.

Meeting GST requirements for ITC on gifts

GST regulations have specific requirements to claim ITC. This applies to free gifts also. Businesses at times are finding it difficult to claim ITC on gifts under the GST regime. Businesses must follow certain aspects of meeting GST requirements for ITC on gifts.

• Understanding the GST Framework

Understanding the GST framework is very necessary for claiming ITC on gifts. Businesses shall take care to fulfil the requirements set by GST regulations. This will make them align their practices to follow the legal framework laid down by GST regulations.

• Business Use and Connection to GST Activities

One of the basic conditions for claiming ITC on gifts is to develop a clear connection between gifted items and their usage in business activities. This connection is enough to prove that gifts are not for personal use but for business objectives only.

• Adherence to Anti-Profiteering Provisions

  • • There are certain anti-profiteering provisions laid down in GST. Businesses that want to claim ITC on gifts must follow these provisions. 
    • These provisions ensure that companies do not follow unfair practices, helping them benefit from the tax credit system.
    • Businesses shall be transparent in pricing their products and services. They shall also take care to pass on the benefits to consumers to comply with anti-profiteering provisions.

• Regular Compliance Audits

To see that GST requirements are fulfilled properly, businesses shall conduct regular compliance and audit reviews. This will help them to understand if there are any gaps or discrepancies in ITC claims on gifts. If anything is located, they can also take immediate steps to rectify the issue before it escalates.

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

Complying with ITC rules for giveaways

In today’s world full of competition, it is not easy to convince customers and expect loyalty from them. To fulfil this, businesses nowadays are using powerful way of giveaways and promotional items to engage with customers. But this needs to be done keeping in mind the ITC rules. Or else companies won’t be able to claim ITC on these giveaways. Here are certain ways to ensure that ITC rules for giveaways have been followed.

• Understanding ITC Rules for Giveaways

Firstly, the companies must understand the core principles of ITC rules for giveaways. The input tax credit is a mechanism through which businesses can offset the tax paid on inputs against the final tax liability. To claim ITC on giveaways, businesses must strictly follow the rules laid by the tax authority.

• Developing Business Usage and Intent

One of the major rules for ITC giveaways is the business usage of complimentary items. The giveaways that a business does must be for the course of their regular business activities.

• Technology Integration

Technology integration can surely help to improve the efficiency of ITC rules for giveaways. Businesses can install advanced accounting software that integrates with GST reporting. This will help in automating and tracking the documentation process.

Strategies for successful ITC claims on gifts

Distribution of gifts and complimentary items helps the business to improve customer relationships and enhance brand loyalty. However, it is not easy to claim ITC on gifts under GST regimes. So, you need to formulate a proper strategy to overcome this and have a successful ITC claim on gifts.

• Establish a Clear Purpose

One must be sure about the purpose behind the distribution of free gifts. Tax authorities want the free gifts distributed to be directly related to the business. Businesses shall give proper explanation about how these gifts are going to contribute to their operations and marketing efforts.

• Educate and Train Staff

A well-educated workforce is necessary to maintain proper compliance. Moreover, Businesses should invest in training and educating staff members who engage in accounting roles. They also will be able to maintain proper records as per GST requirements, which will smoothen the ITC claim for free gifts.

• Collaborate with Tax Professionals

Therefore, businesses shall get into a tie-up with tax professionals. They have a good amount of tax knowledge and can help you rectify any errors in claiming ITC on gifts

• Adaption to Regulatory Changes

Tax laws and amendments keep on changing. You shall stay informed of this change and bring changes in the business accordingly.

Also Read: Can You Claim ITC on Free Gifts?

Best practices for claiming ITC on free items

If you want your business can claim ITC on free items then you need to follow certain best practices. Here are certain best practices that businesses can follow to optimize their tax benefits.

• Business shall maintain clear documentation. Invoices, delivery challans and other documents must outline the details of the free gifts.
• Complimentary items shall be in the course of business. It shall be directly related to the marketing efforts of the business.
• Businesses shall include the value of free items in the calculation of their turnover. This will fulfil regulatory requirements.
• Businesses shall undertake a regular compliance audit to ensure that ITC rules for free items are followed properly.
• The business shall train its accounting staff so that they understand the ITC rules properly and comply with tax regulations.
• Businesses shall stay updated with changes in tax laws and implement it immediately.
• Collaborating with tax professionals will help the business to fulfil the requirements for ITC claims of free gifts.

Conclusion

After going through this article, you can now understand the requirements for claiming ITC on free gifts. Moreover, to fulfill the eligibility criteria to claim ITC on free gifts, proper compliance, documentation, and strategic alignment of promotional activity with business are required. Businesses must be accurate in maintaining their financial records to ensure the claim is not rejected. Additionally, by adopting these techniques and staying updated with tax laws, businesses can enhance their chances of ITC claims for free gifts.

Also Read: INPUT TAX CREDIT UNDER GST

Frequently Asked Questions

• Is GST applicable on free gifts?

GST is not applicable on free samples or promotional items that companies provide as a sample to customers. However, the total value of the same shall not exceed ₹50,000 in a financial year.

• What are Free Samples and Free Gifts?

Free samples are products given to consumers to try before making an actual purchase. Moreover, this is a direct marketing strategy used by FMCG companies to market new products. Free gifts are additional products that are offered free when customers purchase certain products.

• How does Input Tax Credit (ITC) relate to free gifts?

The input tax credit is a mechanism that allows businesses to compensate the tax paid against the inputs on their final tax liability. However, in the case of free gifts, businesses need to meet specific requirements to claim ITC, which is compliant with tax regulations.

• Who is eligible to claim ITC on free gifts?

Businesses shall properly record each transaction involving complimentary items to meet GST compliance. But for this, they need to meet certain requirements laid down by GST regulations.

• Is there any need for documentation of ITC claims on free gifts?

Indeed, proper documentation is very important for successful ITC claims on free gifts.

• What is the role of compliance audits in claiming ITC on free gifts?

Conducting regular compliance audits helps identify and rectify any discrepancies found in ITC claims for free gifts.

• Is ITC available on Diwali Gifts?

Businesses can also claim ITC on Diwali gifts that they purchase and distribute to persons related to the business.

• Which are the sections relating to GST applicability on gift/free samples?

Section 16 of the CGST Act and Section 17(5)(h) of the CGST Act are the sections relating to GST applicability on gift/free samples.

• How can the business adapt to changes in taxation laws related to ITC on free gifts?

Businesses need to stay informed about amendments in tax laws and update the processes accordingly to meet ITC claim requirements.

• Can we claim GST on Sweets?

Yes, you can also claim input tax credit on sweets.