APRIL 12, 2017

By Prerna Gupta

IN the competitive era of business, offering promotional items to dealers/ distributors/ customers is one of the most successful methodsto sustain in the market. With the advent of GST Law, offering promotional items may be construed as "supply" due to the change in the definition of taxable event i.e. Supply.

The meaning and scope of supply has been defined in Section 7 of CGST Bill, 2017. The expression 'supply' includes the activities specified in Schedule I, made or agreed to be made without a consideration. Entry 1 of Schedule I of CGST Bill, 2017 inter alia states "Permanent transfer/disposal of business assets where input tax credit has been availed on such assets". Entry 2 of the said schedule has provided an exclusion to the gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee from the ambit of supply.

Further more, CGST Bill, 2017 provides for credit of input tax charged on any supply of goods or services which are used or intended to be used in the course or furtherance of the business barring some exceptions. The exceptions include the goods written off or disposed of by way of gift or free samples. (Ref: Section17(5)(h) of CGST Bill, 2017).

Free ceramic mug on purchase of products worth Rs. 1000; offering calendars, pen holders, etc. to dealers/ distributors; providing display boards for brand promotion, etc., are some of the common instances of promotional activity undertaken in the competitive marketplace. At this juncture, it is pertinent to analyze whether the promotional items will be construed as 'supply' on which GST will be levied or will it be covered under the ambit of gift/ sample and hence, input tax credit will have to be reversed as per Section 17 of CGST Bill, 2017.

As the term 'gift'/ 'business asset' is not defined under the CGST Bill, 2017, IGST Bill, 2017 and UTGST Bill, 2017, meaning of these terms will be construed based on common parlance.

Gifts

The term ' gift' ordinarily means something which is given voluntarily to other person without consideration and the donor should not derive any mere advantage from such gifts.

Australian Rulings have also specified the true ambit of gifts wherein it has been stated - 'for a supply to be a gift, it must be transferred to the recipient voluntarily. It must not be subject to any contractual obligation and the donor cannot receive an advantage of a material character for the giving of the gift. Where it is reasonable to conclude that in kind payment is made merely in recognition of a supplier's benevolence in providing the gift, the payment is not consideration'.

Thus, in order to determine the nature and characteristic of gift, the test of "Expectations vs Contractual obligations" can be considered. For instance,promotional items given to business associates on a mere expectation of growth of business may not disqualify these items from the coverage of gifts.

However, under VAT Laws of different countries like Malaysia, Singapore and UK specific monetary limit has been prescribed for supply of gifts without any tax by traders/ manufacturers, etc., which signifies gifts are not assessed on the basis of its nature/character as discussed in the aforementioned paragraph and are construed as taxable supply. Prescribed monetary limit is only an exemption from tax on gifts up to certain value and the same does not exclude gifts from the purview of levy of tax on supply.

Business Assets

'T he Transfer of Business as a Going Concern Guide- Malaysia Goods and Service Tax' defines "business assets" as any assets of a business whether movable or immovable and include trading stock, machinery, furniture, fixture and fittings and premises. Further, various other foreign laws have defined business assets on parallel lines.

A simple example to define business asset taken from Singapore Law- Sale and Disposal of Business is as follows:

"Printing company A sells its old photocopying machine to printing company B. A has to charge B with GST for the machine, and account for the output tax based on the selling price to B."

Further, in the VAT Laws of different countries such as UK, Singapore and Malaysia, the expressions 'business assets' and 'transfer or disposal of business assets' are present with the specific exclusion of gift upto a certain monetary limit and samples. Also, in accordance with the CGST Bill, 2017, the exemption provided relating to the specific monetary limit fixed for gifts given by employer to employee signifies that gifts may not be out of the purview of levy of tax on supply.

Thus, in light of the aforementioned discussion, the term 'business assets' has a wide ambit and it covers every item of business which has some market value and will be used in the course or furtherance of business for a long period of time. The asset should be contributing to the business in such a way that the consumption does not happen completely in a shorter duration. Reference can also be taken from foreign judgements like Customs and Excise Commissioners v West Herts College [2000 WL 33201420] to determine the true nature of business asset.

However, there is no clarity provided under the CGST Bill, 2017 with regard to the promotional items as to whether the concept of deemed supply will prevail over the negative list specified for input tax credit. For instance, the promotional items satisfying the criteria of gifts can be construed as supply of goods if input tax credit has been availed on them or is it mandatory to reverse the input tax credit on such items.

Another point of concern is with regard to the implication on promotional items like flyers, pamphlets wherein these items neither falls under the ambit of business asset nor gift. Whether the input tax credit can be availed on procurement of these items from third party and no tax shall be payable on disposal of such items by the supplier is another question that needs to be answered.

(The author is Junior Associate, Lakshmikumaran & Sridharan and the views expressed are strictly personal.)