Taxability and ITC availability on Gifts under GST by CA Ragini Goyal & Adv. Rakesh Chitkara
By: – Rakesh Chitkara
Goods and Services Tax – GST
Dated:- 16-10-2017
FAQ 1: What is a gift?
The word 'gift' has not been defined in the CGST Act. Hence, one will have to refer to other laws as well as case laws to determine the meaning of the term.
Gift-Tax Act (18 of 1858) had defined the word gift 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.
The Honorable Supreme Court cited the definition of 'gift' from Corpus Juris Secundum, Volume 38 in the case of Sonia Bhatia v. State of UP 1981 (3) TMI 250 – SUPREME COURT as follows: A 'gift' is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. A 'gift' is a gratuity and an act of generosity and does not require a cons
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lower fees against the donation made.
From the above analysis, one can conclude that to constitute a “gift” following elements are required to be satisfied:-
(1) Supply must be made without any contractual obligation. If any supply is made under a contractual obligation it cannot be termed as a 'gift'.
(2) 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'.
FAQ 2: Which provision affects the taxability of gifts and treatment of Input Tax Credit on inward supply of gifts under the GST law?
Section 17 (5) of the CGST Act deals with Blocked credits. Clause (h) of Section 17(5) deals with ITC on gifts. The relevant part of the said provision reads as under:
Sec. 17(5): Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of th
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, when given by an employer to its employee.
FAQ 3: What type of gifts are given in course or furtherance of business? When gifts are purely for sales promotion/ publicity, can ITC be availed?
Different types of gifts may be given in course or furtherance of business. Some of them are customary and almost all of them are in course or furtherance of business. There may be unbranded gifts, branded/ customized gifts in the form of publicity material, Diwali gifts or gifts on festive occasions, target based rewards in lieu of discounts/ incentives etc.
“In course of business” means usual business practice such as manufacturing, trading etc. It implies those transactions which are directly related to business without which business cannot be run, like purchase of raw material, capital goods etc. On the other hand, furtherance of business means the act of advancement/promotion of business for its sustained growth and profitability.
In such a scenario, it can be understood that Diwali gif
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e with Section 15 read with the Valuation Rules and not hypothetically.
FAQ 4: Some gifts may not have clearly evident/ commercial or monetary consideration, but may have extra commercial consideration receipt, as nothing in this world is free. What happens in such case?
Ans. A "gift" is generally an inducement, i.e. a means of influencing the recipient. The act of inducement cannot in general be excluded from the scope of being a supply, and if the consideration is not wholly in money, the transaction becomes subject to Valuation Rules. In such case the Valuation Rules require the transaction to be valued at Open Market Value of the subject goods (given by way of gift). The “Open Market Value” of ordinarily purchased goods can be easily reckoned as the purchase price of the same goods. In such case, if the giving away by way of gift is considered as a supply to be valued at the cost of purchase, the Input Tax Credit involved shall be equal to the output GST payable on the
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er Section 17 is thus, business gifts only, which has been barred. The issue for the blocking of credit by way of Section 17(5) is not whether it is in course or furtherance of business or not, but rather it is whether it is for consideration or not. If yes, whether the quantification of the consideration and payment of GST on the same is distinctively required or not.
FAQ 5: Clause (h) of Section 17(5) of CGST Act 2017 stipulates that the input tax credit with respect to the “goods” disposed of by way of gift shall not be allowed. The definition of goods as per Section 2 (52) means “every kind of movable property…………..which are agreed to be served before supply or under a contract of supply”. That means, for a commodity to be called “goods” under this law, it is necessary that it is used for the purpose of supply and in order to deem a particular transaction as supply, it should have some consideration involved or else, the same should be mentioned under S
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it by provisions of Section 17(5)(h) by way of this fiction of the definition of “goods”.
FAQ 6: When it is clear enough that gifts are in course or furtherance of business and the conditions under Section 2 (52) and Section 16 also are satisfied, why ITC on gifts should not be available?
ITC on goods given away or disposed as “gifts” should not be available when no tax is being paid on their disposal. The logic of satisfying Section 16 (1) is of no avail to earn this credit lawfully, because Section 17(5) itself starts with a non obstante clause, which means even if Section 16 (1) allows, Section 17(5) shall block.
Moreover, Section 17 (5) is a specific provision because it is an established principle that specific provisions prevail over general provisions. In the landmark case, J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P., 1960 (12) TMI 77 – SUPREME COURT , it was held:
"9. …We reach the same result by applying another well known rule of constructio
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and the other general. If there is dispute between Section 16 and Section 17(5), in our view, Section 17(5) should prevail.
Section 16 is a general provision and Section 17(5) is specific. Section 17(5) over rides Section 16(1) in clear words. Furthermore, though 17(5) is non obstante clause unless section 16 conditions fulfilled ITC is not eligible and once eligible if not hit by 17(5), only then ITC can be availed. In other words, if something qualifies for ITC under section 16 but is blocked from ITC under section 17 then ITC would not be available.
Similarly, if there is a contradiction between Schedule I and Section 17(5) (h), in my view, Schedule I should prevail.
FAQ 7: Whether the sweets and beverages purchased for distribution to employees/workers/customers/ associates on Diwali?
It should be noted that section 17(5) (b) (i) specifically restricts the input tax credit with respect to food and beverages and Section 17(5) (h) restricts or bars credit on gifts. Hence any sw
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versal on such goods by the person who makes the gift. When purchased as B2C, ITC will not become available and the total cost of purchases including the GST component can be availed as deduction under Income tax law.
Especially, because gifts are voluntarily given and do not create any contractual obligation, even if they are in course or furtherance of business, the registered person should adopt a policy that whenever goods are purchased for the purpose of gifts, they are purchased as B2C supplies from a registered person to reduce/ remove hardship of reversal and reconciliation.
FAQ 9: What about gifts given as offer packs, like Buy1Get1free, X item free against purchase of 100 pieces Y item etc.
Section 15 of the CGST Act talks about “Transaction Value”. Every time, something is given free of cost or a promotional scheme, it has an extra commercial consideration which creates the confusion for payment of GST on outward supply or reversal of ITC or both.
The above are gifts/
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mpany, can it be said to be sales promotion expenditure and not a gift and can ITC be availed.
The intention in such kind of gifting is not to popularize the logo in itself, but to get some sort of business mileage, however, it is worthy to note first, that incurring an expenditure is nothing, but consuming something. When that expenditure is directly related to the supply in course or furtherance of business, it is an input. No customer seeks an obligation of company logo printed publicity material, in course of supply of its goods. It is the supplier's own will to supply such goods and he gives them as gifts as no customer would wish to pay for it voluntarily, and hence it cannot be said to be a component in course of supply.
The above arguments emphasize towards two vital aspects to be comprised in a transaction for furtherance of business:
* Regularity : Is the activity conducted in a regular manner based on sound and recognized business principles?
* : Is the activity predo
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ands as remuneration either.
The intent is that, all goods should suffer indirect tax upto the level at which they are consumed, unless specifically exempted. If gifts given to business associates or employees are not taxed when they are disposed, and ITC is also allowed upon them, the tax on such goods shall get avoided in a way.
Even the erstwhile Central Excise law, did not allow Cenvat credit on items purchased and given as gifts, or free samples. The erstwhile Rule 3(5) had prescribed that when inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in Rule 9. The Cenvat Credit availed on procurement of such goods could be utilized for pa
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ent to an employee is reward or compensation for the service which he rendered as an employee and hence beyond scope of supply.
Entry 2 of Schedule I, requires one to pay GST on gifts made to employees exceeding ₹ 50,000/- to an employee during a year. Now what is Schedule I, it is those transactions which are without consideration but held as supply. Which means, if anything is given for a consideration, i.e. service as per terms of service in case of employment, it is covered by Schedule III and cannot be covered under Schedule I at all. Only those transactions shall enter Schedule I, which are without consideration, i.e. not covered by the terms of contract in case of employees, but given voluntarily. Since they are not exempt by virtue of Schedule III, limited exemption of ₹ 50000/- per year employee is conferred under Schedule I specifically.
FAQ 13: Anything given to an employee, unless mentioned in his offer letter or such defined remuneration / incentive will be “
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paid again on the amounts exceeding 50,000/-. If yes, how will such valuation be made?
It so appears that there is double taxation in this case, but then taxing twice is against the spirit of GST and it is hard to accept that this is the intent of the provisions. As discussed above, the value of outward supply in such cases as per valuation rules is open market value, i.e same as purchase cost. The foregoing of GST is nothing but payment of GST on the said goods disposed without any consideration. This should suffice. This also paves way for availing ITC on gifts to employees upto the value of ₹ 50,000 in a year.
* Whether the foregoing or reversal of ITC (as a consumer of such goods / as a B2C transaction as discussed above) is not equivalent to payment of GST on any transaction being considered as deemed outward supply. As per earlier central excise law also, payment of duty was considered at par with reversal of cenvat credit. In GST also, if IC is foregone, no further pa
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e employee under Income tax law.
The Entry No 2 of Schedule I vis a vis employees and all other related persons is a gamut of confusion and needs to be immediately reviewed by the law makers with seriousness and addressed with clarity.
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The above article in the form of FAQ is written by CA. Raginee Goyal (Guwahati) and Advocate Rakesh Chitkara (New Delhi) based on an online panel discussion among various GST experts, consultants and academicians based in various cities of India, namely, Sri Akshay Rajendra Shah, Sri Amar Nath Singla, Sri Anket S Dodya, Sri Anuj Kakkar, Sri Ashu Dalmia, Sri Abhay Desai, Sri Chintan Shah, Sri Gaurav Gupta, Sri Gawesh Narula, Sri Jignesh Kansara, Sri Keshav R Garg, Sri Mithun Khatri, Sri Mohit Golchha, Sri Monish S Shah, Sri Prashant Shukla, Sri R K Soni, Sri Sanjiv Pahwa, Sri Saurabh Gupta, Ms. Shaifaly Girdharwal, Sri Sudhir Jhanjee, Sri Tarun Agarwal, Sri MP V
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