TREATMENT OF SALES PROMOTION SCHEME UNDER GST

[Mr. M. GOVINDARAJAN]

Sales Promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media marketing communications for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability. Examples include contests, coupons, freebies,  loss leaders, point of purchase displays, premiums, prizes, discounts, product samples, rebates etc.,  Sales promotions can be directed at either the customer, sales staff or distribution channel members, such as retailers.

Some promotional schemes such as free offer, discount etc., are having impact on GST.  Whether the value of such free offers, discount should be added to the value of the product or service for the purpose of levy of GST.

Section 15(3) of the Central Goods and Services Tax Act, 2017 provides that the value of the supply shall not include any discount which is given–

• 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
• after the supply has been effected, if–
  • 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
  • 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.

Thus the provisions of GST clearly stipulate the treatment of discount that is used in the course of business as to the exclusion from the valuation for levy of GST.

There are no explicit provisions for other promotional schemes.  Therefore difficulties are experienced by the stakeholders and they represented the Government seeking clarifications.

The GST policy wing of Central Board of Indirect Taxes and Customs have now come up with a circular No. 92/11/2019, dated 07.03.2019 giving clarifications on four types of sales promotional schemes as the levy of GST, availment of input tax credit etc.,  The said schemes are-

• Free samples and gifts;
• Buy one get one free offer;
• Discounts including ‘buy more, save more’ offers;
• Secondary discounts.

Free samples and gifts

All of us aware that some industry especially pharmaceutical industry provides drug samples to their stockists, dealers, medical practitioners etc., without charging the cost of that products for the purpose of promotion of that products.

Section 7(1)(a) of the CGST Act provides defines the term ‘supply’ as including-

• all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
• import of services for a consideration whether or not in the course or furtherance of business; and
• the activities specified in Schedule I, made or agreed to be made without a consideration as detailed below-
  • Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
  • 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;
  • 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.
  • Supply of goods-
    • by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
    • by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
  • 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.

It is clarified by the Board that the free of supply does not come under Schedule I and as such offering free samples and gifts will not constitute ‘supply’ and therefore not liable to levy of GST.

In regard to the availment of input tax credit for free samples and gifts, we have to refer the provisions of section 17(5)(h) of the CGST Act,.  Section 17(5)(h)  of the CGST Act, provides that the input tax credit shall not be available in respect of the goods stolen,  destroyed, written off or disposed of by way of gift or free samples.

The Board clarifies that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.

Buy one, get one free offer

Some readymade companies offer one dress free if one dress is purchased either in the festival season or at all times.  Golgate offers tooth brush free if tooth paste is purchased. As discussed earlier if the supply is made free of cost then the levy of GST is not applicable.  But in this case one is given free along with the one at a price.  The free product is not given separately.  It amounts to supplying of two goods in one price.

The Board clarifies that the taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.  Section 8 provides that the tax liability on a composite or a mixed supply shall be determined in the following manner-

• 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
• 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.

ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

Discounts including ‘Buy more, save more’ offers

The discounts may be of many types-

• increase in discount with increase in purchase volume;
• periodic or year ending discounts i.e., post discounts;

In the case of the type of first discount, the details of discount will be shown in the invoice whereas in the second case it could not be indicated in the invoice itself.  But there may be a description in the invoice, as to the discount as per the terms of the agreement made between the supplier and the recipient, before the supply.  Such discounts are passed on by the supplier through credit notes.

It is clarified that discounts offered by the suppliers to customers (including staggered discount under ‘Buy more, save more’ scheme and post supply / volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in section 15(3) of the said Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.   The supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

Secondary Discounts

In this scheme there is no offer of discount by the supplier to the recipient.  Subsequently after the sales the discount may be offered by reducing the price of the product. For the discount value the supplier shall issue credit note.

The stakeholders sought clarifications of the Board as to whether credit notes(s) under section 34 (1) of the said Act can be issued in such cases even if the conditions laid down in section 15(3)(b) of the said Act are not satisfied.

Section 34(1) provides that where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed.

Section 15(3)(b) provides that he value of the supply shall not include any discount which is given after the supply has been effected, if–

• 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
• 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.

The Board has clarified that credit note(s) can be issued as a commercial transaction between the two contracting parties.

The Board further has clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in section 15(3)(b)  of the said Act are not satisfied. There is no impact on availability or otherwise of ITC in the hands of supplier in this case.