Navigating GST Compliance in Sponsorship Services

[Asha Latha]

Introduction

In the realm of modern marketing, sponsorship stands as a pivotal strategy for businesses aiming to enhance visibility and brand association through events. This is the basic reason which describes why expenditure on sponsorship contributes to significant chunk of marketing expenditure.

Sponsorship entails providing financial support, products, or services to endorse events, individuals, or organizations, thereby boosting brand recognition. Unlike charitable donations, sponsorships involve reciprocal benefits such as naming rights, logo displays, exclusive booking privileges, or sponsoring prizes—activities that align sponsors closely with the promoted entity.

This article delves into the critical aspects of sponsorship under the Goods and Services Tax (GST) regime in India as the implications of GST on sponsorship services have a profound impact on both the sponsors and recipients, requiring a comprehensive understanding of the tax regime.

Treatment of sponsorship services under GST

Under GST, the definition of sponsorship draws from its historical context under service tax laws. While not exhaustively defined, sponsorship broadly covers the following activities, as defined under section 65(99a) of the Finance Act, 1994-

• naming an event after the sponsor;
• displaying the sponsor’s company logo or trading name;
• giving the sponsor exclusive or priority booking rights;
• sponsoring prizes or trophies for competition;

but does not include any financial or other support in the form of donations or gifts, given by the donors subject to the condition that the service provider is under no obligation to provide anything in return to such donors.

Analysis of the definition

• Naming an event after the sponsor (like DLF while sponsoring IIFA Awards, the speaker introduces the event as DLF IIFA Awards). Likewise we see DLF IPL.
• Displaying the sponsor company’s logo or trading name, like in Cricket when there is a match going on and we see Pepsi written at the hoardings all along the ground and on the stumps.
• Giving the sponsor exclusive or priority booking rights like Honey Singh Concert is going on and Red FM sponsors the above concert and Red FM provide their audience free passes to watch the function.
• Sponsoring prizes or trophies for the competition, like the Man of the Match will be provided a car or a Samsung LED Television.

Donation and Gifts

Further, Donations and Gifts are excluded as it will be provided out of natural love and affection. However if donations/gifts have been provided with a profit motive in future like suppose if a company bears education costs of Mr X but the person will have to perform managerial functions in the company after completion of his studies. In such case, Donations and Gifts will not be covered by exclusion.

Circular no. 24/2019-20 – GST dated 06-11-2019 provides when donations or gifts given shall not be considered as advertisement and not taxable under GST as per which there should be no reference or mention of any business activity of the donor which otherwise would have got advertised. Thus the three condition are required to be satisfied for non leviablity of GST namely:

• The gift /donation is made to a charitable institution.
• The payment has the character of Gift or donation.
• The purpose is charity rather than an advertisement.

Hence the word sponsorship is an inclusive definition not an exhaustive definition. An exhaustive definition means that no other thing can come beyond its purview. The items listed in the exhaustive definition are only applicable to the subject, whereas in inclusive definition the area is wide open and resembled cases will come within its purview.

The activity of providing sponsorship is a supply of service and liable to GST if it falls under any of the activities mentioned in the definition above and carried out for a consideration.

Applicability of Reverse charge on sponsorship services

In the realm of GST, the liability to pay GST typically falls on the supplier of goods or services i.e., under Forward Charge Mechanism (FCM). However in certain cases, the recipient becomes liable to pay GST to the Government Exchequer instead of paying it to the supplier of goods or services, following the Reverse Charge Mechanism (RCM) outlined in Section 9(3) & (4) of the CGST Act, 2017.

In this regard, Entry no 4 of notification no. 13/2017-Central Tax (Rate) and entry no 5 of notification no. 10/2017-Integrated Tax (Rate) as amended from time to time, are relevant and reads as follows-

Supply of sponsorship services by any person to any Body corporate or partnership firm located in the taxable territory is chargeable to GST under RCM.

Supply can be made by any person but recipient shall be either body corporate or partnership firm to get covered under RCM. Let us understand the term Body Corporate.

Body Corporate

Para b of Explanation to notification No. 13/2017 ibid made reference to section 2(11) of the Companies Act, 2013 which defined the term ‘Body Corporate’ as to include a company incorporated outside India, but does not include —

• A co-operative society registered under any law relating to co-operative societies; and
• Any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf.

Excluding co-operative society and any notified body corporate, it includes all companies registered under the Companies Act including companies incorporated outside India.

Further Limited Liability Partnership (LLP) registered under the provisions of the Limited Liability Partnership Act, 2008 is also considered a partnership firm for the purposes of RCM notification.

Therefore, if the recipient of the sponsorship service is a body corporate or a partnership firm (located in taxable territory) including LLP then such recipient would be liable to pay GST under RCM. Let us understand the same with the help of following illustrations-

Illustration 1

Supplier of sponsorship services: A2Z Events (a business entity)

Recipient of sponsorship services: Company B (a Body Corporate)

• Company B, enters into a sponsorship agreement with A2Z Events, for promoting its products during an event. The consideration for this sponsorship service is Rs.1, 00,000/-.
• This transaction covers under RCM as Company B being the recipient of sponsorship services is a body corporate.
• Company B, being the recipient of the sponsorship services, is required to pay the GST on behalf of the supplier, A2Z Events (business entity).

Illustration 2

Supplier of sponsorship services: A2Z Events (a business entity)

Recipient of sponsorship services: B&T Traders (a business entity)

• B&T Traders, enters into a sponsorship agreement with A2Z Events, for promoting its products during an event. The consideration for this sponsorship service is Rs.1, 00,000/-.
• A2Z Events, being the supplier of the sponsorship services, is required to collect the GST from B&T Traders and pay to the Government under FCM (business entity).
• Here RCM will not attract recipient of services is neither a body corporate nor a partnership firm.

Exemption to sponsorship of specified sporting events

Certain sponsorships, particularly those involving specified sporting events, enjoy exemptions from GST. The list of sporting events whose sponsorship has been exempt under entry no 53 of notification No. 12/2017- Central Tax (Rate) as amended from time to time, is as follows-

• by a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, State, zone or Country;
• by Association of Indian Universities, Inter University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India or Special Olympics Bharat;
• by the Central Civil Services Cultural and Sports Board;
• as part of national games, by the Indian Olympic Association; or
• under the Panchayat Yuva Kreeda Aur Khel Abhiyaan Scheme.

Availing ITC on RCM Tax paid on sponsorship services

ITC on the tax paid under RCM for sponsorship services can be availed by the recipient as per Section 16 of the CGST Act, 2017, if the services are availed for effecting taxable supplies (including zero-rated supplies).

However, it’s essential to note that if sponsorship services are obtained from an unregistered supplier, the recipient must raise a self-invoice as mandated by Section 31(3) (f) of the CGST Act, 2017. Input tax credit can only be claimed based on this invoice, subject to payment of tax.

Advertisement vs Sponsorship

Distinguishing between advertisement and sponsorship is crucial under GST, where advertisement falls under FCM while sponsorship typically falls under RCM. Clear contractual delineations are essential to avoid misconstruing sponsorship as advertisement, thus ensuring correct tax treatment.

The differentiation lies in the object of the contract, i.e., if the Payee offers publicity and Payer contributes directly and inextricably with publicity as the purpose of the payment then it is advertisement. But if publicity is incidental, and the purpose of the payment is to defray costs incurred or expected to be incurred by the Payee, then it would be sponsorship.

Brand promotion vs Sponsorship

The term ‘brand promotion’ in not defined under GST Act, 2017 but reference can be made to Service Tax regime where service of brand promotion was a declared service and it was covered under Section 65(105) (zzzzq) as below:

“Taxable service” means any service provided or to be provided to any person, by any other person, through a business entity or otherwise, under a contract for promotion or marketing of a brand of goods, service event or endorsement of name, including a trade name, logo or house mark of a business entity by appearing in advertisement and promotional event or carrying out any promotional activity for such goods, service or event.

Explanation- For the purposes of this sub-clause, “brand” includes symbol, monogram, label, signature or invented words which indicate connection with the said goods, service, event or business entity.

In this regard, ruling by Gujarat AAR in the case of M/s. Indian Society of Critical Care Medicine[1] is found relevant which ruled that-

‘’24. Tax Liability for showcasing name/logo/brand of other persons by ISCCM.

i. We hold that a suitable place for any entity to promote itself is at sponsored events such as trade fairs, exhibitions and events such as subject Criticare conference. Such entities are benefitted immensely by highlighting themselves before prospective customers in the said criticare conference. These companies pay consideration to ISCCM and in return get their name/ logo/ brand on stage Backdrop, Standy, Taxi, E-Rickshaw, Chair Head, Rest Cover, Itinerary, Bottle Wrapper, Logo in media, Stationery etc.; Display of their brand in a souvenir for the event (space will be allotted in the souvenir); Presentation (for a specific time slot) and DVD Display. The essence of this service is Sponsorship Service.

ii. ISCCM supplies Sponsorship services to its respective customers which finds entry at SAC 998397 under the category of ‘Sponsorship services and brand promotion services’. We note that with regard to sponsorship service GST liability is on Reverse Charge Mechanism on the service recipient when the recipient is located in the taxable territory, vide Notification 13/2017- CT(R) dated 28-6-17. We find the supply in this regard to be Sponsorship service supply and dismiss ISCCM’s submission that this supply is brand promotion supply.’’

Similar ruling is given by Rajasthan AAR in the case of M/s. All Rajasthan Corrugated Board and Box manufacturers Association[2].

Thereby the activity of sponsorship is wide enough to include brand promotion and attracts GST under RCM.

ITC reversals

For organizations who are providing sponsorship services are having negative impact on their ITC, as they are required to reverse their ITC by virtue of rule 42 of CGST Rules, 2017 to the proportion of exempt supplies[3] where goods/services are used partly for effecting taxable supplies (including zero-rated supplies) and exempt supplies.

For the purposes of Rule 42, the value of exempt supplies shall be such as may be prescribed under explanation 1 of Rule 43[4], and shall include supplies on which the recipient is liable to pay tax under RCM, transactions in securities, sale of land and, subject to para 5(b) of Schedule II, sale of building.

Thereby supplier of sponsorship services (where liable to GST under RCM), is required to reverse common ITC as per Rule 42. Let us understand the same with the help of following illustration-

Mr. X has organized a musical event in Dec’ 2023 at Mumbai and in that event SPONSOR Private Ltd is giving sponsorship of ₹ 500,000/-. ITC reversals are computed as below-

SI.No.	Particulars	Amount (Rs.)
A	Total revenue earned by Mr. X in FY 2023-24	1,00,00,000
B	Taxable supplies	80,00,000
C	Exempt supplies	15,00,000
D	Sponsorship	5,00,000
E	Common ITC available to Mr. X	60,00,000
F	Reversal of ITC (F = E* (C+D) / A)	12,00,000 {Rs.60,00,000/- * (Rs.15,00,000/-+ Rs.5,00,000/-) / Rs. 1,00,00,000/-}

Mr. X will raise invoice for sponsorship service of ₹ 5, 00,000/- (without GST) on SPONSOR Pvt Ltd who will pay GST @ 18% on ₹ 5, 00,000/- (under RCM) i.e., ₹ 90,000/- tax implication.

Analysis of tax implication

• In above illustration we can clearly see that Mr. X is receiving an amount of ₹ 5,00,000/- as revenue and he is reversing ITC of ₹ 12,00,000/- .There is no way to justify logic behind reversing ITC more than the revenue which you have received.
• Government is collecting revenue of ₹ 90,000/- from Sponsor Ltd and disallowing Credit of ₹ 12, 00,000/- to Mr. X. This implies that Government is earning revenue (Direct + Indirect) of ₹ 12, 90,000/- on transaction of ₹ 5, 00,000/- which shows that double taxation is not completely eradicated from system.

Reversal of ITC in case where Sponsorship service is provided by registered person doesn’t appear lawful and it is well expected that this anomaly will be fixed by GST Council very soon to ensure that double taxation on single transaction is avoided and loss of ITC to service provider is minimized.

On above discussion it is expected that in coming GST Council meetings one out of following two actions can be taken :-

• exception of SPONSORSHIP Services will be added to deeming provision under section 17 (3) or,
• Amend RCM notification for keeping SPONSORSHIP service out of reverse charge.

Any one of above action would result in excluding sponsorship services from exempt supply while calculating reversal under rule 42 & 43.

Recipient’s Registration Requirement

In general, every supplier needs to get registered under GST. However, small businesses with an aggregate turnover below the threshold limit are exempt from registration. On the other hand, a person required to pay tax under RCM must obtain compulsory GST registration. If the recipient of sponsorship services is unregistered, they must register within 30 days of receiving the services and comply with GST provisions.

Applicability of reverse charge on SEZ units

Are SEZ units also required to discharge tax under RCM on supplies liable under RCM?

Wherein clarification was sought, as to whether the SEZ unit is liable to pay GST in respect of legal services, sponsorship services etc. received by an SEZ unit in IFSC, Gandhinagar, from a unit in DTA, which are chargeable to GST under RCM, Tax Research Unit, CBIC, New Delhi, clarified as under:-

"3. Since the intention of the Legislature is not to tax supplies to a unit in SEZ or a SEZ Developer which have been zero rated under clause (b) of section 16(1) of the IGST Act, by virtue of deeming provision under section 5(3) of the IGST Act, 2017, levy for procurement of input services specified under notification No. 13/2017-CT (Rate) falls upon the unit in SEZ or the SEZ developer. It is, therefore clarified that a unit in SEZ or the SEZ developer can procure such services, where they are required to pay GST under reverse charge, without payment of integrated tax provided the actual recipient, i.e. unit in SEZ or SEZ developer, furnishes a Letter of Undertaking in place of a bond as specified in condition no. (i) in para 1 of notification No. 37/2017-CT. The actual recipient of service is the deemed supplier/registered person for the purpose of fulfilling other conditions in para 1 of the notification ibid including the manner of furnishing of Letter of Undertaking.”

Similar views are ruled in many rulings and few such rulings are M/s. Portescap India Private Limited[5], M/s Abans Alternative Fund Manager LLP[6] & M/s. Waaree Energies Limited[7].

From above, it is imperative that an SEZ unit/developer can procure sponsorship services (or any other services liable under RCM) without paying GST under RCM by furnishing LUT/bond.

Challenges and Future outlook

The GST framework for sponsorship services necessitates a nuanced understanding to navigate compliance effectively. Addressing challenges such as ITC reversals and ensuring proper contract documentation are vital for minimizing tax risks and optimizing financial outcomes.

Conclusion

In conclusion, comprehending the nuances of GST on sponsorship services is imperative for both sponsors and recipients. By staying informed and adhering to regulatory guidelines, businesses can strategically leverage sponsorships while meeting their GST obligations. As GST evolves, continued awareness and adaptation will be key to maintaining compliance and maximizing the benefits of sponsorship engagements.

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The views expressed are strictly personal and based on position of law prevailing as on date. This cannot be regarded as an opinion. For any queries or feedback please write to [email protected].

 

[1]   IN RE: M/S. INDIAN SOCIETY OF CRITICAL CARE MEDICINE - 2022 (5) TMI 962 - AUTHORITY FOR ADVANCE RULING, GUJARAT

[2] IN RE: M/S. ALL RAJASTHAN CORRUGATED BOARD AND BOX MANUFACTURERS ASSOCIATION - 2019 (7) TMI 847 - AUTHORITY FOR ADVANCE RULING, RAJASTHAN

[3] section 2(47) read with section 17(3)

[4] Manner of determination on ITC in respect of capital goods and reversal thereof in certain cases.

[5] IN RE: M/S. PORTESCAP INDIA PRIVATE LIMITED - 2023 (1) TMI 1092 - APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

[6] IN RE: M/S ABANS ALTERNATIVE FUND MANAGER LLP - 2024 (4) TMI 844 - AUTHORITY FOR ADVANCE RULING, GUJARAT

[7] IN RE: M/S. WAAREE ENERGIES LIMITED - 2024 (4) TMI 845 - AUTHORITY FOR ADVANCE RULING, GUJARAT