Diwali is around the corner and the markets are all geared up for the festive season. In order to attract more customers and increase sales, businesses offer various discount and incentive schemes.
This time it is expected that businesses will roll out more offers to counter the economic slump. It is therefore important that we understand the GST treatment of these schemes. Here is a list of some of the common promotional schemes and their GST treatment.
- Discount – Businesses offer discounts in many forms. Some of them are – 15% off on all items; Buy 1 Get 50% Discount on second item; Buy for Rs. 12,000 and Pay Rs. 10,000 etc. There are many ways in which discounts are passed and they all have a common aim of reducing the selling price. On sale of a discounted item, businesses need to pay GST only on the discounted price and not the full price. Businesses should ensure that the invoices duly reflect the discount by reducing the sale price or as a separate line item for discount. It should be kept in mind that in case a business deals in items with multiple GST rates, it is important that the discount scheme clearly states the item on which the discount will be given. This will help avoid any disputes in future with the GST department. Businesses can claim full input tax credit unlike older VAT regime in which some of the States required that input tax credit be restricted only to the sale price and excess thereof was to be lapsed.
- Buy Get One Offers (BOGO) – These schemes are akin to discounts, the difference being that they focus on increasing the quantity available instead of reducing the price. Some of the schemes are Buy 1 Get 1 Free; Get 20 grams extra on purchase of 100 grams; Get a shirt free on purchase of every suit, etc. On a first look, it may appear that the extra quantity or item is being supplied free of cost however, effectively they are not being supplied free of cost. The extra item being given is conditional to purchase of certain other items and their price is already included in the price being paid. GST is to be paid on the price being charged and no GST is to be separately charged on the item being given as free. It is important that GST rate is such cases is properly ascertained as it is akin to selling two goods for the price of one. Businesses should determine whether the items being sold are a composite supply or a mixed supply and accordingly, determine the GST rate to be determined. There is no restriction on availing input tax credit on items being given as free.
- Cashback coupons – With e-commerce is firmly establishing itself in the Indian market, cashback coupons have become quite popular. In a cashback, the business recredits a certain amount to the buyer e.g., Buy for Rs. 5,000 and get cash back of Rs. 1,500; Cash back of 5% on use of specified credit card etc. At a casual glance, it appears that a cash back is in the nature of a discount being given to the customer by the seller. A closer look reveals that the seller charges the full price of the product and issues an invoice for the full price. The cash back is given to the customer after the sale is complete and the entire amount is received from him. The seller should be careful not to reduce the amount of cashback from the price of the item as the discount is not reflected in the invoice. GST is paid on the full price of the item and there is no restriction on availment of input tax credit.
- Brand reminders –Diwali is an opportunity for businesses to thank their customers and vendors. Brand reminders are various items like diaries, calendars, keychains etc. which have the brand name or logo of the business on them. The brand reminders are given free of cost and nothing is charged for in lieu of them. No consideration is charged for the brand reminders and no GST is required to be charged on the output side. However, there was confusion on whether input tax credit for purchase of brand reminders is available or not. A recent ruling of the Gujarat Authority for Advance Ruling disallowed input tax credit to a pharma company on scheme products like pens, notepad, key chains, etc., which are distributed to the distributors or doctors with their name embossed. A section of the trade still holds a view that brand reminders are in the nature of promotional expense such as pamphlets, brochures etc. and not gift and therefore input tax credit should be allowed.
- Promotional events – Diwali is a time of the year when promotional events like mall promotion events, exhibitions, roadshows, Diwali celebrations etc. are happening around the town. Any sale of goods or services during these events attracts GST as in normal course of business. The businesses are also allowed to avail input tax credit of expenses incurred for organising these events such as rentals, lease of equipment etc. However, input tax credit in respect of expenses on food and beverages including outdoor catering is not allowed. Similarly, input tax credit for expenses incurred for employee entertainment is not permissible under the GST Law.
The above discussion is illustrative, and traders should evaluate GST treatment of their scheme keeping in mind the fact pattern. The broader principle being that GST is a value added tax and a trader is generally entitled to input tax credit only if GST is paid on the output side.
About the author: CA Anuj Kakkar – Founder, Vriddhi Advisors. Vriddhi Advisors is specialised tax firm which focuses on addressing tax, regulatory and commercial law issues for clients in India and around GCC. The services provided include advisory, compliances and dispute resolution for Goods & Services Tax (GST), Legacy Taxes (Excise, Sales tax and Service tax), Export Import – Customs Law and FTP and Direct Taxes.
CA Anuj Kakkar is the Founder of Vriddhi Advisors. He has more than eight years of specialised experience in indirect taxes including Service Tax, GST, VAT, customs and specializes in supply chain tax optimisation, tax litigation and foreign trade policy. He was actively involved in assisting various companies in planning, implementation and post-implementation support for GST.
He has been a speaker in various technical sessions organised by ICAI, trade forums like PhD Chambers, and management schools like FMS, Amity University, Apeejay School of Management and is an active contributor of articles of professional significance in various journals. He is recognized as GST faculty by ICAI.