GST input on sales promotion – Everything you need to know

Introduction

Every taxpayer employs a variety of techniques to increase sales, the most common of which is a buy one, get one free promotional offer. Furthermore, a sales promotional offer may include a free sample or a bundled offer. The main question that the taxpayer has is how to treat sales promotion offers under GST or does GST apply to sales promotions. So let’s understand about GST input on sales promotion under the GST (Goods and Service Tax) Act.

Useful insights on GST (Goods and Service Tax)

GST is an abbreviation for Goods and Services Tax. It is an indirect tax that was implemented to replace a variety of other indirect taxes such as VAT, service tax, purchase tax, excise duty, and so on. In India, GST is levied on the supply of certain goods and services. It is a single tax that applies throughout India. There are four types of GST, which are explained below:

• Central Goods and Services Tax (CGST): levied on intra-state supplies of goods and services.
• Integrated Goods and Services Tax (IGST) is levied on interstate sales of goods and services.
• State Goods and Services Tax (SGST): Similar to CGST, SGST is levied on the sale of goods or services within a state.
• Union Territory Goods and Services Tax (UTGST): UTGST is levied on the supply of goods and services in any of the country’s Union Territories, including the  Daman and Diu, Andaman and Nicobar Islands, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied in addition to CGST.

Overview of GST input on sales promotion

• Treatment of buy one get one free product or services

In the case of buy one get one free, one product is provided for free. In reality, no individual produce is provided free of charge in the buy one get one free offer. In fact, two or more separate products are sold for a single price. Simply put, two or more products are provided for the price of one. CBIC clarified in the aforementioned circular that the taxability of a ‘buy one get one free’ supply is dependent on whether the supply is composite or mixed, and the rate of tax should be determined in accordance with Section 8 of the Central Goods and Services Tax Act. Input Tax Credit (ITC) –  Suppliers are eligible for an input tax credit for inputs, input services, and capital goods used in the supply of goods or services, or both.

• GST Treatment on free samples and gifts

SUPPLY – Section 7 (1) of the Central Goods and Services Tax Act defines the term “supply.” According to section 7 (1) sub-clause (a), supply includes all forms of supply when agreed to be made for consideration. Thus, free samples and gifts provided without consideration are not considered supplies under GST (except for the activities mentioned in Schedule I). Input Tax Credit – Section 17 (5) (h) clearly states that ITC is not available in the case of free samples and gifts. Thus, suppliers of free samples and gifts will be unable to claim input tax credits for inputs, input services, and capital goods used in connection with free samples or gifts provided without consideration.

• GST calculation for secondary discounts

Secondary discounts are those that are not known at the time of supply or that are offered after the supply has ended. Assume the supplier sells 5000 packets of wafers at INR 10 per packet, then reduces the price to INR 9 per packet. It has been clarified that the supplier may issue financial/commercial credit notes even if the conditions set out in section 15 (3) (b) of the Central Goods and Services Tax Act, 2017 are not met. Since this discount is unknown at the time of supply and the conditions set out in section 15 (3) (b) of the Act are not met, secondary discounts are not excluded from the value of supply. It has been clarified that there is no impact on the availability of input tax credits in the hands of the supplier.

• Discount Treatment under GST input on sales promotion

Discount based on ‘buy more, save more – In the case of ‘buy more save more,’ discounts are given based on volume, for example, a 10% discount is given on purchases of INR 5000 and above, and a 20% discount is given on purchases of INR 10,000 and above. These discounts are reflected on the invoice. It is clarified that such discount offered shall be excluded from determining the value of supply (provided that it meets the criteria set out in section 15 (3) of the Central Goods and Services Tax Act, 2017).

Periodic/year-end stockiest discount – Generally, suppliers offer periodic/year-end discounts, such as 1% off purchases of 10,000 pieces per year and an additional 1% off purchases of 15,000 pieces per year. Such discounts are determined by the terms of the agreement signed at or before the time of supply. Such discounts are not reflected on the invoice because the percentage of discounts can only be calculated after the supply has been made or at the end of the fiscal year. In most cases, the supplier passes on such savings by issuing a credit note. It is clarified that such discount offered shall be excluded from determining the value of supply (provided that it meets the criteria set out in section 15 (3) of the Central Goods and Services Tax Act, 2017). In terms of Input Tax Credit, it has been clarified that the supplier is eligible to claim the credit for inputs, capital goods, and input services used in the supply of goods or services, or both, on such discounts.

Conclusion

In layman’s terms, any transaction conducted during or in furtherance of business for consideration is referred to as a supply under GST. Marketing is done to increase an organization’s sales. Sales promotion is an essential business function for any company. The distribution of promotional items increases the organization’s sales and is thus considered a supply of goods, for which GST is levied.