Gold coins for free distribution may not qualify for input tax credit

Giving free gold coins could prove expensive for businesses as it is unlikely to be classified for input tax credit (ITC).

In sync with the Authority for Advance Rulings in Maharashtra (AAR Maha), the Finance Ministry has said ITC 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.

However, experts say that ‘without any consideration’ is very vague. According to them, normally price of a ‘free gift’ is factored in the sales price of accompanying goods or services.

The matter here is related with a Mumbai-based company Biostadt India Ltd. It launched a new sales promotion scheme namely “The kharif Gold Scheme 2018” for its customers and decided to give gold coins (10 grams and 8 grams) on a purchase in the prescribed quantity. The company approached the AAR to find whether input tax credit (ITC) can be claimed by the applicant on procurement of “gold coins” which are to be distributed to customers as per the scheme.

The company argued that in terms of GST law, every registered person is entitled to credit of input tax charged on any supply of goods or services which are used or intended to be used “in the course or furtherance of business.” The scheme launched by the applicant grants an advantage to the applicant over the competitors and ensures brand as well as market royalty which are important aspects of any business. Accordingly, the scheme is in the course or furtherance of business and thus GST paid on gold coins qualifies to be an ‘input tax’ and credit should be given.

Taxman’s arguments

However, the tax authorities said the gold coins to be distributed by the applicant do not qualify as ‘inputs’ because the said distribution first, is not in line with basic business model. Second, it is not essential for continuity of business and third, is not concerned with making of taxable supply for consideration

The AAR observed that gold coins 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. Accordingly, the gold coins are given by the applicant voluntarily on fulfilment of certain conditions.

Further, it said, in the present case, the statement that gold coins will be distributed to customers on achievement of certain conditions is an assurance to give away ‘gifts’ on those conditions being achieved by the customers. Accordingly, it ruled that the applicant cannot claim ITC on procurements of gold coins or on other promotional schemes.

According to Harpreet Singh, Partner (Indirect Taxes) at KPMG, while the ruling appears to be correct to the extent that no ITC is allowed for gifts, but the debate whether the product being supplied free is a ‘gift’ or a ‘business marketing expense’ would continue. “Industry would continue to take the view that free supply is nothing but a business expense and hence credit should be admissible,” he said.

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