Clarifications on GST treatment of sales promotion schemes

The Ministry of Finance vide its Circular No. 92/11/2019-GST dated March 7, 2019 clarified GST positions for various sales promotion schemes prevalent in the industry. The gist of various clarifications is as under:

1. Free samples and gifts

• The supplier provides samples of its goods (such as drug samples in pharmaceutical industries) or gifts to its potential customers on free-of-cost (‘FOC’) basis.

• Samples / gifts provided on FOC basis, would not qualify as a supply. Consequently, ITC on inputs / input services / capital goods, to the extent used in such gifts / samples, shall not be available as per Section 17(5) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’).
• If the provision of samples / gifts constitutes to be an activity specified in Schedule I (like giving samples / gifts to related person without consideration etc.), GST will be payable as well as ITC will be eligible.

NITYA Comments:

If samples / gifts are given to related person without consideration and GST becomes payable by virtue of Schedule I, still the character of the goods will continue to be samples / gifts only. Though Circular clarifies that no ITC need not be reversed on such goods, legally ITC will be reversible under Section 17(5)(h) of the CGST Act.

2. ‘Buy one get one free’ offers

• The supplier announces offers to provide additional goods of like or different kind on purchase of a product depicting the whole transaction as a ‘buy one get one free’ offer. Such an offer will be considered as two individual supplies at a single price. Accordingly, ITC will be available in such cases.
• The rate of tax would apply after determining whether the same constitutes to be a composite or mixed supply.

NITYA Comments:

The Circular provides a relief to the industry as far as availability of ITC is concerned. However, the Circular has not clarified whether such supplies will constitute to be composite or mixed supply. It is pertinent to note that GST law does not provide clear principles for characterization of supplies as composite or mixed supplies. On the contrary, various Advance Rulings have laid down contradictory criterion on this aspect. Consequently, unless the Government comes out with clear tests, the taxpayers are likely to face litigation on this front wherein the tax authorities will attempt to classify every offer as mixed supply that being subject to highest rate of GST.

3. Buy more save more offers

• The supplier offers ‘volume discounts’ or ‘target based discounts’ to their customers on purchase of certain quantity of goods. Such discounts are either declared on the invoice itself (price based targets) or documented in an agreement at or before the supply (quantity based targets). In the latter case, discounts are passed through GST credit notes post quantification of such discounts.
• These discounts will be deductible from the assessable value from GST perspective if:
• It is offered upfront at the time of supply, or
• If it is offered post supply, the factum of such an offer is established through an agreement before or at the time of supply.
• The position of ITC reversal on account of such offer, would be as follows:

4. Secondary discounts

• The supplier provides such discount after the supply; consequent to re-determination of value of goods at future point of time. 
• The suppliers can issue only financial / accounting credit notes (without GST) to pass on such discounts. The suppliers cannot claim tax adjustment in such cases as such discounts do not satisfy the conditions laid down under Section 15 of the CGST Act (discussed in Point 3 above).
• The offering of such discounts shall not impact the availability of ITC or otherwise in the hands of supplier in such cases.