Union Budget 2024: Clarity on ITC Eligibility for Sales Promotion Expenses Pivotal

Karan Kakkar, Partner at Grant Thornton Bharat, and Pragya Sharma, Associate Director at Grant Thornton Bharat, emphasize the critical need for reforms to streamline Input Tax Credit (ITC) claims in India’s GST regime. While GST was introduced to simplify India’s tax system and ensure a seamless flow of ITC, businesses have encountered numerous challenges and inconsistencies, particularly regarding ITC eligibility on sales promotion expenses.

The recent GST Council meeting unveiled substantial proposals from Finance Minister Nirmala Sitharaman but industry stakeholders are anticipating additional measures. 

The Need for Clarity and Consistency

In the recent GST Council meeting, Finance Minister Nirmala Sitharaman presented substantial proposals. However, industry stakeholders are still looking for additional measures to address their concerns. With the Union Budget on the horizon, businesses are hopeful for clarity on ITC uncertainties, comprehensive reforms to simplify ITC claims, reduced compliance burdens, and improved transparency within the GST framework. These reforms are essential for fostering a conducive business environment and boosting economic growth.

The Role of Sales Promotion in Business

Sales promotion activities, including discounts, gifts, free samples, loyalty programs, and promotional merchandise, are crucial for businesses aiming to attract customers, boost sales, and enhance brand visibility. However, GST provisions impose specific restrictions on the eligibility of ITC for goods given as gifts or free samples for promotional purposes.

The ambiguity surrounding the definition of ‘gift’ has led to the consistent denial of ITC. According to a CBIC press release dated July 10, 2017, ‘gift’ has not been defined in the GST law but generally refers to something given without consideration, voluntarily, and occasionally. Circular №92/11/2019-GST dated March 7, 2019, clarified that ITC is not available for goods and services used as gifts or free samples without consideration. If the distribution qualifies as a “supply” under Schedule I of the Act, the supplier can avail ITC.

Conflicting Rulings and Interpretations

The GST implications of promotional schemes have been a long-standing source of debate and confusion, with various conflicting rulings and interpretations. For example, the Tamil Nadu Appellate Authority for Advance Ruling (AAAR) ruled in the case of GRB Dairy Foods Pvt Ltd. that goods distributed as part of a promotional scheme do not qualify as a supply, and therefore, ITC is not eligible. This view was also upheld by the Karnataka AAAR in the case of Page Industries.

Understanding the Rationale for ITC Eligibility

The argument that companies distribute goods to dealers and customers purely on a voluntary basis, without any business objective, is unreasonable. These promotions are embedded within the overall supply value and serve strategic business purposes. While they may appear as ‘gifts’ from a marketing perspective, they are far from gratuitous in a commercial sense. Sales targets and promotional offers are incorporated into the value of supply, on which taxes are paid, aligning with the principle that ‘nothing is free.’

Addressing Industry Concerns

Addressing the concerns of Indian businesses regarding ITC eligibility on sales promotion expenses is crucial for fostering a business-friendly environment under the GST regime. Clarity and consistency in GST provisions related to ITC on promotional expenses are pivotal. As businesses await the upcoming Union Budget, their hopes are pinned on comprehensive reforms that streamline ITC claims, reduce compliance burdens, and enhance transparency.

By addressing these issues, the government can ensure a more straightforward, efficient, and business-conducive tax environment, promoting economic growth and stability.