The Diwali festival season is around the corner now.
Many companies are planning to gift their employees with Diwali gift hampers, vouchers, goodies, etc.
The budget for this activity can go very high for businesses with a large number of employees.
It's also prevalent practice in many professions to offer promotional items to clients, distributors, partners, etc.
This article will look at the GST impact of such promotional items on the businesses’ working capital. We will also find out if we can claim GST Input Tax Credit on Diwali gifts & other promotional goodies.
Can businesses claim ITC on free Diwali gifts?
When businesses invest a considerable sum of money in purchasing Diwali gifts for their employees, it goes without saying that the business has also paid GST on this purchase.
Hence, businesses find a way to claim the Input Tax Credit under GST for GST paid on this purchase.
So, can businesses claim ITC on free gifts or promotional items distributed for free?
The answer is a big NO!
According to the Section 17 sub-section 5 (b) (i) of the CGST Act of 2017,
- ITC is prohibited on goods offered by way of gifts or free samples.
- Hence, ITC has to be reversed on goods distributed as free samples or promotional items.
To learn more about ITC reversal, click on the link.
Well, this can be a problem for businesses now.
The festive season is around. Diwali, Christmas, New Year, etc. This is the best period where businesses can build their relations with their clients and distributors by offering them some free gifts or promotional items.
This is a traditional technique that businesses adapt to further their cause and attract more clients.
In the next section, we will discuss a few tweaks that businesses can do in their accounting techniques or billing to maximize their Input Tax Credit claim and experience the joy of giving in this festive season.
How to maximize your ITC on promotional items or gifts?
Cases in which Input Tax Credit under GST is prohibited for free gifts & promotional items-
- ITC is prohibited on goods offered by way of gifts or free samples & thus, the ITC has to be reversed for such items.
- Promotional items given to the customers without any intention of main supply shall be liable for ITC reversal.
Following are some of the criteria for an item to be considered as a gift:
- Transfer of a movable or immovable item from one person to another.
- A gift is generally offered to the opposite party without considering the exchange of money or equal worth.
- There will be no contractual obligation involved in this activity.
Gifts DO NOT include:
However, this is not entirely true for the promotional items distributed by a business to its clients or distributors.
By offering these promotional items, businesses plan to widen their client base, attract new customers, strengthen existing relations, etc.
Let us look at some of the ways to maximize ITC on such items:
1. Distribution of Diwali gifts to your employees
2.Distribution of Diwali gifts or promotional items to customers
For example, An electronic shop is putting up a Diwali offer that provides a free 'Home Theater’ worth RS. 20,000 on the purchase of rs.1,00,000 or more.
To learn more about, Composition Scheme under GST, click on the link provided.
Combo Offer – Validity according to GST
Yes, it’s a completely valid and authentic method. Circular No. 92/11/2019 vividly mentions that businesses can claim Input Tax Credit under GST when such promotional items are offered as a part of the combo offer.
The tax paid on this combo offer is treated as the tax paid on the promotional item included in the combo offer as well.