No Input Tax Credit for GST paid on expenses incurred on promotional schemes, rules AAR

Input Tax Credit (ITC) will not be available on the Goods and Services Tax (GST) paid on expenses incurred towards promotional schemes, an order by the Maharashtra Authority for Advance Ruling (AAR) has said.

Although AAR rulings are applicable for the applicant and the jurisdictional tax officer in a particular matter, the same can be used a persuasive tool in similar matters. Accordingly, tax experts feel that the ruling can be important for automobile or FMCG companies which give gifts as a part of promotional schemes or as brand reminders.

Pharmaceutical company Sanofi India had approached AAR for rulings regarding two issues — whether input tax credit is available on the GST paid on expenses incurred towards promotional schemes of Shubh Labh Loyalty Program and whether input tax credit is available for the GST paid on expenses incurred towards promotional schemes given as brand reminders?

The company launched ‘ Shubh Labh Trade Loyalty Program’ under which the distributors/wholesalers get reward points on the basis of goods sold by them. These points later enable them for rewards such as free trip to Singapore, wrist watch etc. Also, the company incurs various marketing and distribution expenses for distributing pens, notepads, key-chains etc. as promotional items/brand reminders to its distributors with its name embossed on such items.

Nature of ‘gift’

During the hearing, the applicant discussed the concept of ‘gift’ in light of the facts of the case and various judicial precedents under various other Statutes wherein it contended that as gift is a gratuity and act of generosity, the distribution of items by Sanofi for promoting the brand cannot be said to be an act of gratuity or generosity wherein the items are given to increase the sales of the company and advance of business. As regards the Shubh Labh Loyalty Program, the applicant submitted that the programme is not a gift but is given under contractual scheme (wherein the distributors are required to accept the terms & conditions on the Website).

However, in its response, the tax authority mentioned that the expenses under discussion incurred by the appellant are in the nature of ‘gift’ as “there is no commercial consideration and therefore input tax credit (‘ITC’) in respect of such expenses is restricted by virtue of GST law.”

The AAR held that since the items are not given by the applicant under any contractual obligation as no contract/agreement has been signed by customers in writing accepting the scheme floated by the applicant. Considering that the items are voluntarily, given on certain conditions achieved by its customers and without consideration in money, these are in the nature of ‘gift’. This means no ITC will be available.

According to Harpreet Singh, Partner at KPMG, in this case it has been held that items were not given by the applicant under any contractual obligation as no contract/agreement was signed by customers in writing accepting the scheme floated by the applicant. Accordingly, they partake the character of a gift. Therefore, “as a corollary, can one say that where scheme of giving promotional items is well documented and is as per a contractual arrangement, the same would be acceptable to authorities as a business expense not requiring any credit reversal,” he said.