GST UPDATE No 157 ON ITC ELIGIBILITY ON FREEBIES

The concept of “Input Tax Credit”, in Indirect Tax Reform has been introduced to eliminate the cascading effect and promote seamless flow of input tax credit throughout the transaction chain. However, it is not so easy to justify the availment of input tax credit on freebies. The revenue authorities are adamant while interpreting the provisions of input tax credit and consequently, refrain from giving input tax credit easily to the taxpayers. The present update seeks to discuss the issue of admissibility of input tax credit on freebies given by business for sales promotion. Quoting the recent judgment imparted by Apex Court in the case of M/S APEX LABORATORIES PVT. LTD. V/S DEPUTY COMMISSIONER OF INCOME TAX wherein the Hon’ble Supreme Court upheld the ruling that pharmaceutical companies are not entitled for deduction of expenses incurred on distribution of freebies/incentives to medical practitioners. The Hon’ble Court was of the view that the freebies ranging from gifts, fridges, chains, LCD TVs etc. are technically not “free”. Their cost is generally included in the prices of the drugs and therefore gearing the overall prices of the commodities. The above decision was rendered in the context of Income Tax Laws. However, if the analogy of the Apex Court judgment is enforced in the GST regime as well, it can cast a doubt on the applicability of provisions contained in section 17(5)(h) of CGST Act, 2017 wherein input credit is blocked in case goods are distributed as free samples or gifts. The revenue authorities are of the view that input credit on freebies shall stand blocked since goods disposed of as a freebie doesn’t attract any output tax. However, looking into the current scenarios, it is the common practice followed by almost all the business houses specially during festive seasons to distribute their products as free sample. The burning question that arises is whether freebie given by business can be considered as gift? Gifts in common parlance is anything given voluntary, without expecting anything in return, out of love and affection. The question that arises is will any company which runs business to earn profits, distribute goods to its dealers or customers out of love and affection? The answer is a big NO. Goods distributed to dealers and customers are indeed towards business purposes so as to promote and boost the sales resulting into overall business profitability. The underlying motive behind this act is nothing but furtherance of business. Had the situation been that the goods are distributed on a voluntary basis and without any business motive, it would have been useless to argue that ITC should be denied on these transactions. On the contrary, the present situation is far different as goods distributed are with the motive of sales promotion. There are plethora of Judicial pronouncements which have ruled in negative as regards availability of input tax credit on freebies. In the case of BIOSTADT INDIA LTD, Maharashtra AAR held that ITC is denied on distribution of gold coins by the company to its customers on achievement of targets. Further, in case of SANOFI (INDIA) LIMITED, AAR held that ITC was denied in case goods were distributed without any consideration to the customers on fulfillment of certain conditions. Furthermore, the AAR deny the input credit on the basis that since there is no written contract or agreement which existed between the parties. It is submitted that the views taken by AAR as stated above needs to be revisited in light of the Apex Court decision holding that freebies are part of the cost of the product. If such a view is being accepted in GST Laws too, goods distributed as free are infact part of the cost of product on which GST is being paid so technically, they are not free. Hence, one may argue that ITC cannot be denied if goods are distributed as free samples or as gifts to consumers or dealers in the ordinary course of business. The admissibility of input tax credit on freebies has been a matter of dispute since inception. A proper clarification favoring the taxpayers in this regard from the Government is anticipated by the business communities thus marking an end on the unwanted litigations on this issue.

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GST UPDATE No 157 ON ITC ELIGIBILITY ON FREEBIES

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