Central Tax Circulars

CGST Circular 92/2019

To,

The Principal Chief Commissioners / Chief Commissioners / Principal
Commissioners /
Commissioners of Central Tax (All) The Principal Director Generals/Director
Generals (All)

Madam/Sir,

Subject: Clarification on various doubts related to treatment of sales
promotion schemes under GST – Reg.

1) Various representations have been received seeking clarification on
issues raised with
respect to tax treatment of sales promotion schemes under GST. To ensure
uniformity in the implementation of the law across the field formations, the
Board, in exercise of its powers conferred under section 168(1) of the Central
Goods and Services Tax Act, 2017 (hereinafter referred to as “the said Act”)
hereby clarifies the issues in succeeding paragraphs.

2)It has been noticed that there are several promotional schemes which are
offered by
taxable persons to increase sales volume and to attract new customers for their
products. Some of these schemes have been examined and clarification on the
aspects of taxability, valuation, availability or otherwise of Input Tax Credit
in the hands of the supplier (hereinafter referred to as the “ITC”) in relation
to the said schemes are detailed hereunder:

A. Free samples and gifts:

i. It is a common practice among certain sections of trade and industry,
such as,
pharmaceutical companies which often provide drug samples to their stockists,
dealers, medical practitioners, etc. without charging any consideration. As per
subclause (a) of sub-section (1) of section 7 of the said Act, the expression
“supply” includes all forms of supply of goods or services or both such as
sale, transfer, barter, exchange, licence, rental, lease or disposal made or
agreed to be made for a consideration by a person in the course or furtherance
of business. Therefore, the goods or services or both which are supplied free
of cost (without any consideration) shall not be treated as „supply‟ under GST
(except in case of activities mentioned in Schedule I of the said Act).
Accordingly, it is clarified that samples which are supplied free of cost,
without any consideration, do not qualify as „supply‟ under GST, except where
the activity falls within the ambit of Schedule I of the said Act.

ii. Further, clause (h) of sub-section (5) of section 17 of the said Act
provides that ITC
shall not be available in respect of goods lost, stolen, destroyed, written off
or disposed of by way of gift or free samples. Thus, it is clarified that input
tax credit shall not be available to the supplier on the inputs, input services
and capital goods to the extent they are used in relation to the gifts or free
samples distributed without any consideration. However, where the activity of
distribution of gifts or free samples falls within the scope of „supply‟ on
account of the provisions contained in Schedule I of the said Act, the supplier
would be eligible to avail of the ITC.

B. Buy one get one free offer:

i. Sometimes, companies announce offers like ‘Buy One, Get One free‟ For
example,
„buy one soap and get one soap free‟ or „Get one tooth brush free along with
the purchase of tooth paste‟. As per sub-clause (a) of sub-section (1) of
section 7 of the said Act, the goods or services which are supplied free of
cost (without any consideration) shall not be treated as „supply‟ under GST
(except in case of activities mentioned in Schedule I of the said Act). It may
appear at first glance that in case of offers like „Buy One, Get One Free‟, one
item is being „supplied free of cost‟ without any consideration. In fact, it is
not an individual supply of free goods but a case of two or more individual
supplies where a single price is being charged for the entire supply. It can at
best be treated as supplying two goods for the price of one.

ii. Taxability of such supply will be dependent upon as to whether the
supply is a
composite supply or a mixed supply and the rate of tax shall be determined as
per the provisions of section 8 of the said Act.

iii. It is also clarified that ITC shall be available to the supplier for
the inputs, input
services and capital goods used in relation to supply of goods or services or
both as part of such offers.

C. Discounts including ‘Buy more, save more’ offers:

i. Sometimes, the supplier offers staggered discount to his customers
(increase in
discount rate with increase in purchase volume). For example- Get 10 % discount
for purchases above Rs. 5000/-, 20% discount for purchases above Rs. 10,000/-
and 30% discount for purchases above Rs. 20,000/-. Such discounts are shown on
the invoice itself.

ii. Some suppliers also offer periodic / year ending discounts to their
stockists, etc. For example- Get additional discount of 1% if you purchase
10000 pieces in a year, get additional discount of 2% if you purchase 15000
pieces in a year. Such discounts are established in terms of an agreement
entered into at or before the time of supply though not shown on the invoice as
the actual quantum of such discounts gets determined after the supply has been
effected and generally at the year end. In commercial parlance, such discounts
are colloquially referred to as “volume discounts”. Such discounts are passed
on by the supplier through credit notes.

iii. It is clarified that discounts offered by the suppliers to customers
(including
staggered discount under „Buy more, save more‟ scheme and post supply / volume
discounts established before or at the time of supply) shall be excluded to
determine the value of supply provided they satisfy the parameters laid down in
sub-section (3) of section 15 of the said Act, including the reversal of ITC by
the recipient of the supply as is attributable to the discount on the basis of
document (s) issued by the supplier.

iv. It is further clarified that the supplier shall be entitled to avail
the ITC for such
inputs, input services and capital goods used in relation to the supply of
goods or services or both on such discounts.

D. Secondary Discounts

i. These are the discounts which are not known at the time of supply or are
offered
after the supply is already over. For example, M/s A supplies 10000 packets of
biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs.
9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per
packet.

ii. The provisions of sub-section (1) of section 34 of the said Act provides
as under:

“Where one or more tax invoices have been issued for supply of any goods or
services or both and the taxable value or tax charged in that tax invoice is
found to exceed the taxable value or tax payable in respect of such supply, or
where the goods supplied are returned by the recipient, or where goods or
services or both supplied are found to be deficient, the registered person, who
has supplied such goods or services or both, may issue to the recipient one or
more credit notes for supplies made in a financial year containing such
particulars as may be prescribed.”

iii. Representations have been received from the trade and industry that
whether credit
notes(s) under sub-section (1) of section 34 of the said Act can be issued in
such cases even if the conditions laid down in clause (b) of sub-section (3) of
section 15 of the said Act are not satisfied. It is hereby clarified that
financial / commercial credit note(s) can be issued by the supplier even if the
conditions mentioned in clause (b) of sub-section (3) of section 15 of the said
Act are not satisfied. In other words, credit note(s) can be issued as a
commercial transaction between the two contracting parties.

iv. It is further clarified that such secondary discounts shall not be
excluded while
determining the value of supply as such discounts are not known at the time of
supply and the conditions laid down in clause (b) of sub-section (3) of section
15 of the said Act are not satisfied.

v. In other words, value of supply shall not include any discount by way of
issuance of
credit note(s) as explained above in para 2 (D)(iii) or by any other means,
except in cases where the provisions contained in clause (b) of sub-section (3)
of section 15 of the said Act are satisfied.

vi. There is no impact on availability or otherwise of ITC in the hands of
supplier in
this case.

3) It is requested that suitable trade notices may be issued to publicize
the contents of
this Circular.

4) Difficulty if any, in the implementation of this Circular may be brought
to the notice
of the Board. Hindi version will follow.