GST ITC reversal Free of cost, Goods and Services Tax - GST

[Madhavan iyengar]

A Company manufactures Item B This manufactured item B some pieces have been given Free of Cost to some customers

Issue For the manufactured items given as Free of Cost is GST required to be charged when they are given

Kindly also note that in terms of Schedule I of CGST Act

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

1. Permanent transfer or disposal of business assets where input tax credit has been
availed on such assets.

If we refer to above schedule then can it be inferred that the item (being a business asset ) further the term business asset is not defined in GST law) given as FOC even with out consideration will fall in Schedule I as ITC has been availed for manufacture of the FOC item

Hence sec 17(5)(h) would not apply ie ITC need not be reversed.

Experts kindly give your views

Posts / Replies

[KASTURI SETHI]

If definition of 'business assets' has not been given in GST Acts, we are to resort to legal definition which is very wide and covers each and everything of the factory engaged in the manufacture of taxable goods.

I am of the view that one should not be a victim of jugglery of words. As per FAQ, if input tax credit has not been taken, even then the supply of business assets is taxable but it is subject to assailment of threshold exemption limit. No doubt about its taxability.

What is most crucial is that A company has not paid tax on the item 'B' because of free supply. Hence Schedule-1 (Clause No.1) does not help A at all. Reversal is required, it being hit by Section 17(5)(h) of CGST Act.

[MUKUND THAKKAR]

I agree with reply of Kasturi Sethi sirji,

The supplier of such goods cannot exempt himself from payment of tax on such goods by claiming to have reversed input tax credit proportionate to goods supplied for free.

It is only when stocks that are ‘not meant for sale’ for supply are ‘disposed off’, the words ‘in respect of’ manages to recover input tax credit relatable to the inputs used in the production of such stocks that no longer make a taxable supply.

[Alkesh Jani]

Sir,

In this regards, my views is as follows

First, for applicability of tax, the activity should fall within the ambit of “Supply”. As we know, if no consideration is received no tax is applicable, further, it should be for business or furtherance of business. Therefore, Law makes it clear that although no consideration is received it shall be treated as “Supply” in terms of Schedule-I. Of course, goods are assets (as Invoice is transfer of title of goods), but when supplied (with or without consideration) it will be a “Supply”. The schedule-I only makes it clear to treat the activity as “Supply”.

Now, if we peruse, the opening para of Section 16, it mention that ….entitled to take credit….therefore, person may take credit for the tax paid on inputs (fulfilling the conditions and restrictions). The Section 17 (5) states that “Input tax credit is not available….” means person may take the credit as per Section 16 and to examine its eligibility, if not, shall be debited (reverse) in the same tax period (or else Section 73 or 74 comes into play, ITC availed or utilized) for proper accounting also (refer Section 42). Further, word “reverse” is not used in the Section but ‘take’ and ‘availed’ has different meaning and provisions should be interpreted accordingly.

In view of above, I agree with the views of our experts. Experts are also requested to correct me if mistaken.

Thanks,

With Regards

[KASTURI SETHI]

I agree with Sh.Alkesh Jani Ji except on one point and that is there is no difference between the words,'take' and 'avail'. Both are same. Dictionary meaning cannot be construed as per one's sweet will. Dictionary meaning of any word is internationally recognized.

[CSSANJAY MALHOTRA]

Best proposition is to pay ITC on goods cleared on FOC basis, if ITC has been availed in back chain. Business Assets means both Current and Fixed Assets for e.g. Raw Material in stock, WIP, FG, other Fixed Assets.

Payment of ITC is better instead of ITC Reversal as per Section 17(5) due to the reason that ITC reversal will always be contentious issue and is higher than ITC availed on account of inclusion of ITC of services / capital goods also. So, safer to pay GST on FOC supplies and avail ITC.

[KASTURI SETHI]

Sh.Sanjay Malhotra, CS Sir,

Really anew way-out (offbeat positively) is more beneficial for the querist.

[Alkesh Jani]

Dear Experts,

I thank for taking this discussion to its knowledge sharing level, the query is with regards to charging of Tax or to reverse ITC, in case of supply of goods on FOC basis and in this regards, the insights were made available for best judgment.

Further, it was made clear that word “take” and “avail” has different meaning and provisions are to be interpreted accordingly. In this support, the meaning of “take” and "avail" is given below

(a) lay hold of with one’s hands, reach for and hold – Concise Oxford English Dictionary

(b) to lay hold of; grasp; to get possession of; to gain, to choose; select –Webster’s Concise Dictionary

(c) to lay hold of; to gain or receive into possession; to seize; to assume ownership – Black’s law Dictionary

“Avail”

In case of M/s. Parshva Overseas Vs. Joint Secretary (2011) 274 ELT 496 (Delhi HC DB) = 2011 (2) TMI 1208 - DELHI HIGH COURT, it was held that ‘availed’ signifies actual utilization. It has different meaning from available.

Based on above, I am still of the view that word “take” and “avail” has different meaning and provisions are to be interpreted accordingly.

Thanks,

With Regards

[KASTURI SETHI]

Dear Sh.Alkesh Jani Ji,

Happy to see your views. I wish you must read the relevant (highlighted portion) of both the judgements for the sake of enrichment of our aknowledgement.

The issue of meaning of the words, 'TAKE' and 'AVAIL'. The following two case laws are worth reading . We are concerned with the meanings here.

2009 (240) E.L.T. 328 (P & H) = 2009 (7) TMI 98 - PUNJAB & HARYANA HIGH COURT IND-SWIFT LABORATORIES LTD. Versus UNION OF INDIA

2011 (265) E.L.T. 3 (S.C.)  = 2011 (2) TMI 6 - SUPREME COURT UNION OF INDIA Versus IND-SWIFT LABORATORIES LTD. (See highlighted portion)

Interest - Cenvat/Modvat - Interest on irregular credit whether arises from date of availing such credit or date of utilization - Rule 14 of Cenvat Credit Rules, 2004 specifically providing for interest when Cenvat credit taken or utilized wrongly or erroneously refunded hence interest on irregular credit arises from date of taking such credit.

[Shilpi Jain]

In case, on purchase of certain number of pieces, some pieces are given free then you might not be required to pay tax or reverse ITC if the pieces given free are included in the sale quantity and the price kept the same.

i.e. instead of saying 2 nos for ₹ 50 +1free

you could say 3 nos for ₹ 50.

However, if just given free then the view expressed by the others here would hold good.

[Madhavan iyengar]

Sanjayji

Agreed with your views but

Sec 17(5) needs to be strictly interpreted when FOC is not a supply at all will department take a stand that Regd person has to reverse ITC and then levy interest for non reversal of ITC

Payment of tax is a better option i agree but if they contend that the transaction does not attract gst hence if it is paid then claim refund

[CSSANJAY MALHOTRA]

Sh Madhavan ji,

Department has to follow what's is specifically written in Act. Section 17(5) was to restrict ITC for Traders as they normally have one to one correlation, which manufacturer;s can't have. None can work out exactly the GST involved in Inputs, Inputs Services and Capital goods going into products supplied on FOC basis.

Hence provision was built in Schedule-1 to treat the matters as Supply in case of "Permanent Transfer / Disposal of assets where ITC has been availed on such assets".

Paying GST will always be beneficial on FOC. [Exception to this is the product supplied as FOC with main product, then NO Reversal as is part of Valuation under Section 15 of CGST Act]

Specific to your concern, Refunds (unless specifically provided in Rules & Acts) can't be given but the taxes paid are adjusted against any liability.

I made several business associates to follow the payment route instead of ITC reversal as the provisions in CGST Act does not debar one from complying what's specifically stated in law.

Any views, most welcome as until and unless you debate, best will not come out.

[Madhavan iyengar]

sanjayji thanks for your very good expert views

Paying GST will always be beneficial on FOC. [Exception to this is the product supplied as FOC with main product, then NO Reversal as is part of Valuation under Section 15 of CGST Act]

points in connection with above

FOC is normally sent as warranty ie it is not supplied with original product hence foc is always sent when there is any issue from customer and sent under challan but if we are able to prove that the warranty replacement was included in the original supply value then we can argue out that gst is discharged on warranty replacement also hence no gst to be paid at time of sending the foc under challan. thus record keeping is very important to avoid departmental enquiries

please give your views

[CSSANJAY MALHOTRA]

NO GST is leviable when you clear goods under warranty. (Documents required for Movement: Delivery Challan & E-Way Bill). Further the cost of warranty is part of original product cost on which GST has already been paid off, hence No Reversal of ITC comes in.

You must have seen that Home Appliances, Auto Companies generally charge for Extended Warranty also beyond normal warranty period included in product sold. For e.g. in case of Extended warranty given by Maruti / Honda etc, they charge for same with GST. Hence anything replaced later on is not FOC but price alongwith GST already invoiced to you.

Hope the above addresses your concern and anything else, most welcome.

[Ganeshan Kalyani]

Free goods given on the invoice doesn't have value. It is understood as supply of free goods. The proportionate input tax credit need to be reversed. Instead of this method the tax payer can show the value of foc on the invoice first and then show it as discount and thereby that foc item become free. In my view this could be a better option.