Sales promotion schemes are a common strategy used by businesses to boost sales and attract new customers. However, the tax treatment of these schemes under the Goods and Services Tax (GST) regime has often led to confusion.
The Government of India, through Circular No. 92/11/2019-GST, dated March 7, 2019, provides clarity on various doubts related to the treatment of sales promotion schemes under GST. This article aims to explain the key points and implications of this circular so that you can easily understand the implication of GST on your sales strategy.
Overview of Sales Promotion Schemes
Sales promotion schemes are initiatives undertaken by businesses like yours to increase their sales volume. Common types of sales promotion schemes include:
- Free Samples and Gifts
- Buy One Get One Free Offers
- Discounts (including ‘Buy More, Save More’ offers)
- Secondary Discounts
Each of these schemes has specific implications for GST taxability, valuation, and Input Tax Credit (ITC).
Free Samples and Gifts under GST
Tax Treatment
- Non-Supply: If you supply free samples and gifts without any consideration, the sales do not qualify as a ‘supply’ under GST. This is because, as per Section 7(1)(a) of the Central Goods and Services Tax Act, 2017, a supply requires consideration.
- Exceptions: Activities falling under Schedule I of the Act are exceptions and may still be treated as a supply even without consideration.
Example: A pharmaceutical company distributes free samples of drugs to doctors. Since these samples are given without any consideration, they are not considered a supply under GST, and thus, no GST is payable.
So what does Schedule I of the GST Act says –
1) Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
2) Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
3) Supply of goods—
(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
4) Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
Input Tax Credit (ITC)
- ITC is not available for goods used as free samples or gifts as per Section 17(5)(h) of the Act. However, if such distribution falls under Schedule I activities, ITC may be claimed.
Example: If the pharmaceutical company incurs expenses on inputs for manufacturing these free samples, it cannot claim ITC on these inputs.
Buy One Get One Free Offers
Tax Treatment
- Composite Supply: These offers are not considered as supply of free goods. Instead, they are treated as two or more individual supplies for a single price, making it a composite supply.
- Tax Rate: The tax rate is determined based on whether the supply is composite or mixed, as per Section 8 of the Act.
Example: A company offers a promotion where customers buy one bottle of shampoo and get another bottle free. This is treated as a single supply of two bottles of shampoo for the price of one. The GST rate applied will be the same as that for the shampoo.
What Section 8 of the GST Act says –
Section 8 – Tax liability on composite and mixed supplies
The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
Input Tax Credit (ITC)
- ITC is available for inputs, input services, and capital goods used in relation to such promotional offers.
Example: The shampoo company can claim ITC on the raw materials used to produce both bottles of shampoo included in the promotional offer.
Discounts under GST
Types of Discounts
- Staggered Discounts: Discounts that increase with the purchase volume.
- Post-Supply/Volume Discounts: Discounts provided at the end of a period based on total purchase volume, typically established through an agreement.
Tax Treatment
- Invoice Discounts: Discounts shown on the invoice are excluded from the value of supply if they satisfy Section 15(3) conditions.
- Credit Notes: For volume discounts given via credit notes, the recipient must reverse the corresponding ITC.
Example: A retailer offers a discount of 10% on purchases above ₹5,000 and 20% on purchases above ₹10,000. If a customer buys goods worth ₹12,000, a 20% discount is applied, and the discounted value is used to calculate GST.
What Section 15(3) of the GST Act says-
(3) 5The value of the supply shall not include any discount which is given––
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if—
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
Input Tax Credit (ITC)
- ITC is available for inputs, input services, and capital goods used in relation to supplies involving such discounts.
Example: The retailer can claim ITC on goods purchased to provide these discounts, as long as the discount terms are met.
Secondary Discounts
Tax Treatment
- Credit Notes: Secondary discounts not known at the time of supply can still be issued via financial/commercial credit notes, even if they don’t meet Section 15(3)(b) conditions.
- Value of Supply: These discounts are not excluded from the value of supply, and thus, do not affect the GST calculation.
Example: A supplier sells 10,000 packets of biscuits at ₹10 each. Later, they decide to reduce the price to ₹9 per packet and issue a credit note for ₹1 per packet. This secondary discount is not excluded from the value of supply, and GST must still be calculated on the original value.
Input Tax Credit (ITC)
- There is no impact on ITC availability for suppliers issuing secondary discounts.
Example: The biscuit supplier can still claim ITC on inputs used to manufacture the biscuits, despite issuing a secondary discount.
Key Takeaways
- Uniform Implementation: The circular ensures uniform implementation of GST laws across different regions and sectors.
- Clarity on ITC: Businesses have clear guidelines on when they can and cannot claim ITC for sales promotion schemes.
- Business Compliance: Proper understanding and compliance with these guidelines can prevent disputes and penalties during tax assessments.
Conclusion
The Circular No. 92/11/2019-GST(download) provides much-needed clarity on the tax treatment of various sales promotion schemes under GST. By understanding these guidelines, you can effectively manage your promotional strategies while ensuring compliance with GST laws.
This not only helps in optimizing tax benefits but also in maintaining smooth operations without legal hindrances.
For more detailed information, you can read the full circular and consult with tax professionals to ensure proper adherence to GST regulations.
