NOVEMBER 02, 2020

By S Sivakumar, B.Sc., LL.B., FCA, FCS, ACSI, Advocate

IT is festival season now…Navratri has just got over and we are waiting to celebrate the Diwali and Dhanteras. Though, we don't have a formal concept of thanking our friends and colleagues in the form of a 'Friendship Day' as the Americans celebrate, it is very common for corporates and high net worth individuals to dole out expensive gifts to their employees, vendors and customers, during these holiday seasons. These gifts could take the form of gift vouchers which can be used for purchasing consumer articles, sweet packs, fire cracker packs, gold coins, jewellery, etc., apart from cash.

Several interesting questions could arise, as to the implications on these gifts under the GST law.

The most important question is, of course, the ITC allowability on these gifts, especially those not involving food, sweet packs, etc. As we are aware, in terms of Section 16(1) of the CGST Act, ITC is available on all inward supplies of goods and services which are used in the course of or in furtherance of business, subject of course, to the exceptions mentioned in Section 17(5). There can be little doubt that, these festival gifts, when given to vendors, customers, etc. are to be considered in the course of or in furtherance of business. In the context of Section 37(1) of the Income tax Act, 1961, the ITAT has, in Agfa India Private Ltd v Asst Commissioner of Income tax - 2015-TIOL-2553-ITAT-MUM held that, expenses incurred on Diwali gifts given to customers are to be allowed as business expenses, as these are in furtherance of business. This principle is equally valid under the GST law.

Taking this discussion forward…. can ITC be denied on the basis of Section 17(5)(h) of the CGST Act, which states that, ITC is not available in the case of goods given as gifts or free samples. A study of this Section makes it clear that the ITC restriction is applicable only to goods that are "normally dealt with" by the registered person, as gifts or free samples. Thus, this Section may get attracted when a pharmaceutical firm gives medicines as gifts or free samples. Surely, this Section is inapplicable when goods in the form of gifts are given by corporates that do not manufacture or trade in the very same goods.

We also need to keep in mind, the provisions contained in Section 17(5)(g), in terms of which, ITC is not available on goods or services or both used for personal consumption. As can be seen, this particular section is poorly worded. It is inconceivable for a company to have personal expenses. In the context of Section 37(1) of the Income tax Act, 1961, in Sayaji Iron and Steel Ltd v CIT - 2003-TIOL-312-HC-AHM-IT the Gujarat High Court has held that a company cannot have 'non-business' or 'personal' expenses. This legal principle, though rendered in the context of the income tax law, should have equal applicability under the GST law as well. Thus, based on Section 17(5)(g), ITC cannot be denied to companies, in respect of gifts given to suppliers, customers, etc.

Thus, in my strong view, ITC cannot be denied to the company that doles out gifts to its suppliers, customers, etc. during this festive season.

As regards gifts provided by an employer to its employees, we are aware that in terms of Sl No.1 of Schedule III to the CGST Act read with Section 7(2) of the CGST Act, services rendered by an employee to his employer in the course of or in furtherance of employment, is neither a supply of goods nor a supply of services. In my view, festival gifts given to employees have to be treated as being in the course of or in further of employment. In my further view, gifts given by the employer to its employees would not be covered under the definition of Section 2(47) as per which, "exempt supply" means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply. When gifts given to employees, being in the course of employment, are not to be regarded as 'supply' in terms of Section 7(2) as aforesaid, the question of them being treated as exempt supplies within the meaning of Section 2(47) does not arise.

As regards the gifts given by an employer to an employee, we also need to keep in mind that in terms of Sl No. 2 of Schedule I to the CGST Act, gifts exceeding the aggregate value of Rs 50,000/- per employee, in a financial year will be treated as 'supply' within the meaning of Section 7(1). Apparently, there is a conflict between Sl No. 2 of Schedule I and Sl No. 1 of Schedule III. Invoking the concept of harmonious interpretation, the company/employer doling out gifts to its employees may be required to reverse ITC attributable to gifts in excess of the aggregate value in excess of Rs 50,000/- (per employee). In my further view, there would be no need for ITC reversal on gifts of value less than Rs 50,000/- per employee per financial year.

Many IT companies engage 'consultants' who are not to be treated as employees and consequently, the requirement to reverse ITC would not apply in respect of gifts given to such consultants.

In respect of "gifts" which are in the nature of business assets such as laptops, etc., ITC availed by the corporates would need to be reversed, as these transactions would get covered under Sl No. 1 of Schedule I to the CGST Act, involving permanent disposal of business assets. In my further view, 'business assets' would essential mean 'capital assets'.

Having comprehensively discussed the ITC implications on gifts, can there be a GST liability on employees who receive expensive gifts, in value exceeding Rs 50,000/- in a financial year from their employer. In my view, an employee cannot be treated as being engaged in business qua his employer and, therefore, there cannot be a GST liability on employees. Moreover, there is a specific exemption to employees who render services to their employer, in the course of or in furtherance of employment, in terms of Sl No.1 of Schedule III.

However, when expensive gifts are doled out to non-executive Directors, the employer could be liable to pay GST under RCM, in terms of Sl.No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28th June, 2017.

Before concluding…

During this festival time, many employees have been forced to work from their homes. Many companies are happy about the fact that the productivity of their employees working from homes has gone up, thanks to the support that these employees have received from their spouses. As a token of appreciation, if a company wants to provide Diwali gifts to the spouses of its employees rather than to its own employees, will ITC have to be reversed?

No Sir, is my humble view.

[The views expressed are strictly personal.]