GST Implications of Promotional Schemes: ITC on Gold Coins - Insights from Recent Karnataka AAR Ruling
BRIEF FACTS OF THE CASE
• The applicant is a Public Limited Company registered under the provisions of Central Goods and Services Tax Act, 2017 as well as Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act and KGST/SGST Act respectively) and is engaged in manufacturing of cement.
• They have implemented the "Monthly/Quarterly Quantity Discount Scheme" with defined purchase targets for dealers in various locations. This scheme applies to all their products.
• Additional guidelines for the scheme include eligibility criteria, benefits in the form of gold coins, and disbursement through credit notes.
• Dealers in Karnataka who purchase a specified quantity of OPC under this scheme receive discounts, leading to eligibility for gold coins. The company purchases these coins at the end of each quarter and claims GST Input Tax Credit.
• Rather than adjusting credits against dealer payments or issuing credit notes, the company distributes benefits, including gold coins and white goods, based on the credited amounts in the dealer's account.
QUESTIONS RAISED BY THE APPLICANT
1. Does the obligation of the applicant to provide gold coins and white goods to dealers upon reaching specific purchase targets during a promotional scheme period qualify as "goods disposed of by way of gift" under the CGST Act, 2017?
2. If so, would this trigger restrictions on Input Tax Credit (ITC) for the applicant, as per Section 17(5)(h) of the CGST Act, 2017?
3. Is the obligation of the applicant to provide gold coins and white goods to dealers upon reaching specific purchase targets during a promotional scheme period considered a "permanent transfer or disposal of business assets" where ITC was previously claimed on these assets?
4. Does this constitute a supply, even if provided without any monetary consideration, and make it subject to GST under Schedule-I of the CGST Act, 2017?
5. Does the obligation of the applicant to provide gold coins and white goods to dealers upon reaching specific purchase targets during a promotional scheme period qualify as a supply under Section 7 of the CGST Act, 2017?
6. This question seeks clarification on the broader tax treatment of these transactions under the general provisions of the CGST Act, 2017.
Applicant's Interpretation of Law:
ITC should be allowed of the GST paid on procurement of promotional products which are given to dealers as part of promotional schemes:
• Section 16(1) of the Act deals with the availability of ITC to a registered person and Section 17(5) of the Act deals with Blocked credits.
• As per Section 16(1) of the said Act credit is available of input tax paid on goods which are used for furtherance of business.
• However, as per Section 17(5)(h) of the Act, "Input tax credit shall not be available in respect of the following, namely: goods lost, Stolen, destroyed, written off or disposed of b-t./ way of gift of free samples".
• The applicant submits that in the instant case, the gold coins and white goods are provided to the dealers in furtherance of business so as to promote and enhance the sales of the company.
• Thus, ITC should be allowed of the GST paid on procurement of gold coins and white goods which are given to dealers as part of the promotional schemes. Whereas Section 17(5) of the Act covers gifts for the purpose of ineligible credit which is not the case of the Applicant.
To constitute a 'gift' the property should be transferred voluntarily and not as a result of a contractual obligation:
• 'Gift' has not been defined under the Act. Hence, reference will have to be made to other statutes and the jurisprudence available on the same. Gift, as per the Gift-Tax Act (18 of 1858) has been defined to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money's worth.
• To constitute a "gift" following elements are required to be satisfied:
--> Supply must be made without any contractual obligation. If any supply is made under a contractual obligation it cannot be termed as a 'gift'.
-->Supply must be made without any consideration in money or money's worth. Hence, supplies made out of love and affection or such other non-legal considerations can only be termed as 'gifts'.
• Hence, it is allowed to avail the ITC on gold coins and white goods distributed to the dealers as the same are incurred as in the course or furtherance of business and they cannot be regarded as 'gifts' for the reasons mentioned above.
Gold coins and white goods distributed as part of the promotion schemes cannot be regarded as permanent transfer or disposal of business asset where itc has been availed on such assets:
• Business assets are property or equipment that a Company owns that are primarily used for running the business. There are different categories of assets including current, non-current, short-term, long-term, operating, capitalized, tangible and intangible. Business assets are itemized and valued on the asset side of the Balance sheet.
• Further, Schedule-II of the Act provides the list of activities or transactions to be treated as supply of goods or supply of services.
• Entry (4) of the said schedule pertains to the "transfer of business assets". Clause (a) of entry (4) provides that "where goods forming part of the assets of a business are transferred or disposed of or under the directions of the person carrying on the business so as no longer to part of those assets, such transfer or disposal is a supply of goods."
• Based on the above submission gold coins are not business asset.
Gold coins and white goods distributed to dealers as part of the promotional scheme cannot be regarded as supply under section 7 of the act:
• It is evident from the above definition that a transaction can be said to be a supply only if the same has been made or agreed to be made for consideration. Therefore, in the absence of consideration, then supply cannot be said to have been made.
• In other words, the nexus between the supply and consideration is sine qua non to constitute the taxable event of supply.
• In the instant case, there is no consideration received by the applicant from the dealers for the gold coins and white goods distributed to them. Therefore, based on the above submissions, the gold coins and white goods issued to dealers as part of the discount / Incentive schemes cannot be regarded as supply under Section 7 of the Act
RULLING GIVEN BY AUTHORITY:
•Issue gold coins and white goods to the dealers/ customers upon achieving the stipulated lifting of the material/ purchase target during the scheme period would not be regarded as “goods disposed of by way of gift” and Input tax credit would not be restricted under the Section 1 7(5)(h) of the CGST Act, 2017.
• Issue gold coins and white goods to the dealers/ customers upon achieving the stipulated lifting of the material/ purchase target during the scheme period would be regarded as a “permanent transfer or disposal of business assets where ITC has been availed on such assets” and would be treated as a supply even if made without consideration and be subjected to GST under SI. No. 1 of the Schedule I to the CGST Act, 2017
• It would be regarded as a supply under section 7 of the CGST Act, 2017.
CONCLUSION:
In conclusion, the ruling clarifies that providing gold coins and white goods to dealers as part of promotional schemes does not qualify as "goods disposed of by way of gift," and Input Tax Credit (ITC) restrictions do not apply under Section 17(5)(h) of the CGST Act, 2017. However, it is considered a "permanent transfer or disposal of business assets where ITC has been availed," making it subject to GST even without monetary consideration. Additionally, this transaction is regarded as a supply under Section 7 of the CGST Act, 2017.
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