What are the Requirements for Claiming ITC on Free Gifts?

Home » Blogs » What are the Requirements for Claiming ITC on Free Gifts?

Published Date:  25-12-2023   Author:   ateet-sharma
captainbiz what are the requirements for claiming itc on free gifts

Introduction

Customer is 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 from the taxation point of view of whether the input tax credit (ITC) can be claimed on these giveaways or not.

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 on the transaction value of the dominant product.

start free trial of gst billing software

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 Gift given of value not more than ₹50,000 per employee in FY, then ITC is reversed.

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 can the tax be reduced by being eligible for free gifts under ITC. Here are certain key criteria for claiming ITC on free gifts.

  • 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. 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. The free gifts that are used must be an integral part of business and shall be able to enhance their business operations.

  • Meticulous Documentation

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

start free trial of gst billing software

  • Separate Record-Keeping for Free Items

A separate record needs to be maintained for free items for a successful claim of ITC. Due to this transparency is maintained during audits which reveals that the business is committed to compliance.

  • Inclusion in Turnover Calculation

Those businesses who want to seek ITC claim on free gifts shall include the value of these items in the calculation of turnover. This ensures that the activity is legit and helps in getting an ITC claim.

Documenting ITC on complimentary items

Documentation plays an important role in claiming ITC on complimentary items. Each transaction that has been around complimentary items shall be recorded properly 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. A good accounting software that is integrated with GST reporting shall be installed in the company. 

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. Here are certain aspects of meeting GST requirements for ITC on gifts that businesses must follow.

  • 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. The businesses who want to claim ITC on gifts must follow these provisions. 

These provisions ensure that unfair practices are not being followed by companies which helps them to 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. Strict following of rules laid by the tax authority is required to claim ITC on giveaways.

  • 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. Advanced accounting software can be installed 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 so that proper compliance is maintained. Businesses shall invest in training and educating staff who are engaged in accounting roles. They will be able to maintain proper records as per GST requirements and this will smoothen the ITC claim for free gifts.

  • Collaborate with Tax Professionals

Businesses shall get into a tie-up with tax professionals. They have a good amount of tax knowledge and can help you to 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.
  • The value of free items shall be included in the calculation of business turnover. This will fulfil regulatory requirements.
  • A regular compliance audit shall be undertaken 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 now you can understand the requirements for claiming ITC on free gifts. To fulfil the eligibility criteria to claim ITC on free gifts proper compliance, documentation, and strategic alignment of promotional activity with business is required.

Businesses must be accurate in maintaining their financial records to ensure the claim is not rejected. 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 are provided by companies 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 actual purchase. This is a direct marketing strategy used by FMCG companies to market new products. Whereas free gifts are additional products offered free when customers purchase certain products.

  • How Input Tax Credit (ITC) is related 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. In the case of free gifts, to claim ITC businesses need to meet specific requirements which is compliant with tax regulations.

  • Who is eligible to claim ITC on free gifts?

Those businesses that are registered under the GST regime are eligible to claim ITC on free gifts. 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?

Yes, 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?

If regular compliance audits are conducted then it helps to identify and rectify any discrepancies found in ITC claims for free gifts.

  • Is ITC available on Diwali Gifts?

ITC can be claimed on Diwali gifts that are purchased and distributed to persons related to 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 the business can 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 claim input tax credit on sweets.

Spread the love

Ateet Sharma

Ateet Sharma is a B.com graduate and has done an MBA in Finance. He has worked majorly in the banking sector for more than 5 years. He has worked for retail banking as well as credit analysis and has worked for banking brands like Axis Bank, DHFL, Capital First, Bajaj Finance etc. He has written articles on varied topics in finance like banking, taxation, insurance, stock markets etc. Ateet likes to listen to music and read books in his free time.

Leave a Reply