Input Tax Credit on Diwali Gifts

Input Tax Credit on Diwali Gifts & Other Promotional Items

Gaurav Yadav

Updated on November 15th, 2023

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.

Time limit to avail Input Tax Credit | Reversal of Input Tax Credit

How to maximize your ITC on promotional items or gifts?

ITC on Diwali Gifts

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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.

Defining ‘Gifts’

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:

  • Money
  • Securities

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

  • Businesses should note that all the goods in the form of gifts on the occasion of Diwali, Christmas, New Year, other holidays offered to the employees should be treated as ‘Performance Incentives.'
  • When an employer offers some goods or token of appreciation informs a 'Performance Incentive’ to its employees, then the GST Input Tax Credit on such items shall NOT be blocked under Section 17 sub-section(5) of the CGST Act, 2017.
  • Performance incentives can include anything like a Microwave oven, Pressure cooker, a trip to Vietnam, a coupon for a concert this month, etc.
  • However, this should not include any cash or securities.
  • In this case, the ITC can be easily claimed on all the items considered as ‘Performance Incentives’.

2.Distribution of Diwali gifts or promotional items to customers

  • Every festive season, businesses do put out promotional offers to attract customers.
  • This is a tested and verified process that works almost for all businesses.
  • However, when the promotional gifts offered to the customers are large in number, the businesses must be able to claim ITC for it.

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.

  • In this case, businesses should note that promotional items gifted to the customers should be treated as 'Composite Supplies' and should be billed together with the primary purchase by the customer.

To learn more about, Composition Scheme under GST, click on the link provided.

  • In such cases of supply of goods, Input Tax Credit under GST will be available on the composite supply of goods.
  • Like in the example mentioned above, the business can also treat this sale as a ‘Combo Offer' of 1 lakh worth of electronics and the promotional item ‘Home Theater’.
  • Treat this as a ‘Combo Offer’ and avoid using the word ‘gift’ or ‘free gift’ for this promotion.

Get Free Bonus Report: Claim 100% ITC for your business

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.

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Gaurav Yadav

About the author

Gaurav is an Engineer by training with a deep interest in Economics & Finance. He has been associated with the Fin-Tech industry for quite some time now. He writes for GSTHero for topics including GST Compliance, GST Structure, etc & aims to break down complicated technical jargon into simple terms for the taxpayers.

His expertise includes GST Laws, Corporate Finance & Macro-Economics.

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