GST Panel May Suggest Allowing Companies To Claim Input Credit On Free Supplies

A panel set up to review the goods and services tax law suggested giving companies some room for offers like buy-one-get-one-free and free samples, two government officials told BloombergQuint.

The committee may suggest amendments in the law that will allow companies to claim input tax credit for the promotional schemes that pharmaceutical companies offer chemists and consumer goods makers offer consumers. This credit would be restricted to 1 percent of the companies’ taxable turnover, and input tax credit on any such supply beyond this threshold would be denied, said the two officials quoted earlier. The committee has submitted its suggestions to the government and these are yet to be considered by the GST Council, one of the officials said.

The proposals will likely resolve the dispute between the taxman and companies over the treatment of samples and promotional offers under the GST.

This move may bring much-needed clarity on the issue of credit eligibility on free supplies, but their quantum and cap needs to be rational, said Krishan Arora, indirect tax partner at Grant Thornton India LLP.

The impact of capping the input credit eligibility on free supplies based on the overall turnover may vary from industry to industry and a standard cap may not be the most recommended manner of doing away with the anomaly unless backed by industry data and trends, Arora told BloombergQuint.

The need for this clarity comes after the Directorate General of Goods and Services Tax Intelligence issued summons to pharmaceutical companies for providing free samples to chemists without paying tax on them. According to the investigative arm of the indirect tax body, companies claim input tax credit for products they offer for free, but don’t pay GST on it, leading to a revenue loss for the government. Companies argue that such promotions aren’t freebies but discounts, and that GST is paid on the transaction value.

The directorate has initiated investigation against consumer goods companies offering promotional schemes. Input tax credit claimed by these companies on advertisements at point-of-sale display or retail stores is under the scanner as well. BloombergQuint had earlier reported that the tax department had demanded the reversal of input tax credit claimed by the pharma companies on the free samples.

Potential Changes To Businesses

If the proposal to restrict input tax credit is accepted, businesses will have to change their accounting practices. This will need to be done by calculating the value of each item in the case of ‘buy 1 get 1 free’ offers. Businesses may have to issue invoices specifying the value of each product in a promotional offer.

For instance:

• In a ‘buy 1 get 1 free’ offer for shirts, if the price of two shirts is Rs 1,000, the seller may have to mention that the price of each shirt is Rs 500, inclusive of taxes.
• This would help in calculating the tax outgo for businesses after applying the input tax credit restriction.
• Businesses will have the option to either pay GST if promotional offers exceed 1 percent of their turnover or not claim input tax credit.

Businesses may find it beneficial if appropriate levels for availing input tax credit are allowed based on different industry practices, said MS Mani, a partner at Deloitte India.

Some experts, however, aren’t convinced.

Denial of credit or prescribing a threshold for availing credit on free products given as part of marketing schemes isn’t justified as GST is paid on the transaction value, said Abhishek Jain, an indirect tax partner at EY India.

Any denial of input credit could have a significant impact on the marketing policy adopted by the business, he said. “Companies should be allowed to choose the policies without denying them input tax credit.”