Introduction

Businesses can now claim input tax credit (ITC) on items such as gold coins and white goods, which are procured for distribution to dealers as part of promotional schemes. This ruling comes from the Karnataka bench of the Authority for Advance Ruling (AAR) and clarifies the tax treatment of promotional materials.

ITC for Promotional Goods

Orient Cement Ltd sought a ruling from the AAR on whether ITC could be claimed for the distribution of gold coins and white goods to its dealers upon achieving specified sales targets under promotional schemes. The company regularly offers various promotional schemes, including the “Monthly/Quarterly Quantity Discount Scheme,” to boost sales and collections.

“Gift is something which is given without any conditions and stipulations and hence the same cannot be covered under the scope of ‘gift’,” the AAR stated.

The AAR’s decision hinges on the fact that these promotional items are not given without conditions or stipulations. They are issued based on the fulfillment of specific criteria outlined in agreements between the company and the recipients. Therefore, they do not fall under the category of “gifts.”

Furthermore, the AAR clarified that the company’s obligation to distribute gold coins and white goods to dealers and customers upon meeting the stipulated purchase targets during the scheme period should not be considered as “goods disposed of by way of gift.” Consequently, input tax credit would not be restricted in this scenario.

Expert Opinions

Saurabh Agarwal, Tax Partner at EY, commented on the ruling, stating that the Advance Ruling Authority of Karnataka’s decision affirms that the credit on inputs received for promotional expenses, such as distributing gold coins and other items, should not be categorized as gifts. This is because these promotions are associated with certain conditions and are not voluntary.

Additionally, the ruling emphasizes that the distribution of promotional materials should be considered a supply, even if it is done without any consideration, falling under Schedule 1, which covers the permanent transfer or disposal of business assets when input tax credit has been claimed on those assets.

However, Agarwal also noted that this ruling contradicts with previous judgments, and the industry should await further clarification from the GST Council on this matter.

Abhishek Jain, Partner and National Head of Indirect Taxes at KPMG, supported the ruling, highlighting that it distinguishes between target-driven promotional products and gifts. This differentiation allows input tax credit on such promotional items.

Jain also suggested that, given the conflicting rulings in the past and varying positions taken by adjudication authorities, the government could consider issuing a proactive clarification to avoid unnecessary disputes in the future.

Conclusion

This ruling by the Karnataka bench of the AAR provides clarity on the tax treatment of promotional goods. It allows businesses to claim input tax credit on items like gold coins and white goods, which are procured for distribution to dealers as part of promotional schemes. This decision ensures that such promotional activities are not categorized as gifts and affirms that they should be considered a supply for taxation purposes.

However, it’s worth noting that there is a need for further clarification and consistency in rulings to avoid disputes and confusion in the industry regarding the tax treatment of promotional materials.

(This story has not been edited by Smartkhabrinews staff and is published from a syndicated news agency feed – PTI)