Expert Speak Details


Payal Tuli, Partner
Divya Mahajan, Manager
Akshat Gupta, Assistant Manager, Deloitte India

Interplay between the GST law and marketing schemes

The Indian festive season has already begun with the retailers and merchants upping the ante in running various promotional offers for their products. Promotions or marketing schemes attract customers and provide them with the incentive to buy products more quickly and make larger purchases. Marketing schemes include various activities from offering discounts, distributing gifts to issuing vouchers. While some of these schemes are targeted for the end users, others are meant to encourage the distributors and retailers to increase sales to the end customers.

Introducing promotions is a function of company’s marketing strategy, customer demand, market conditions and competitors policies. However, many a times, taxes play an important role in determining how these promotions would be offered to the end customers. The emphasis on tax aspect of these schemes have further increased on account of introduction of goods and services tax (‘GST’) since July 2017. While a country wide unified GST law has put an end to diverse treatments offered by different legislations and States on these schemes, disputes on taxability of these schemes continue even under the GST regime due to ambiguities in the law.

The most common incentive offered by suppliers is discount both pre and post supply of any goods or services. In this regard, Section 15(3) of the Central Goods and Services Tax Act, 2017 (’CGST Act’) provides that the value of supply shall not include the discount amount, if the discount is given:

• Before or at time of supply and such discount is duly recorded in the invoice issued in respect of a supply; and

• After the supply is effected if:

• Such discount is established in terms of an agreement entered into or at time of supply and specifically linked to the invoices; and

• Input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient

In this context, it is also relevant to note Section 34 of the CGST Act which provides that where there is a change in the value of supply or the tax amount, the supplier can issue a credit note for the adjustment in the value of supply and tax amount. The Section further provides a time limit of 6 months from the end of the relevant financial year (in which the supply was made) for issuance of credit note. Therefore, while the GST law provides for adjustment of discounts offered by suppliers from the taxable value, the adjustment is subject to various conditions and compliances. Some companies direct their distributors to provide discounts to the end customers which can be recovered from the company by the distributor. In such situations, the characterization of the discount offered to the distributors as a post-sale discounts vis-à-vis subsidy depends on the way contract is structured and supporting documentation is made. The characterization is relevant because while post sale discounts are allowed as a deduction in the GST law, (subject to fulfilment of certain conditions) subsidies are subject to tax. Hence, it is important for businesses to adequately draft their distributor/ incentive agreements to reflect the true nature of discount and timely undertake associated compliances in order to avail the benefits provided in law.

Another common promotion scheme run by businesses is buy X quantity of a product N and get Y quantity free or offer a gift on purchase of specific quantities of product N. In a country like ours the word ‘free’ draws a lot of eyeballs and the GST authorities are no exception. In this regard, section 17(5) of the CGST Act provides that a taxable person will not be allowed to claim input tax credit of goods disposed of by way of gifts or free samples. Generally, while the promotional items (i.e. Y quantity of product N) are advertised as free/ gifts to the end customers, the cost of providing such items is borne by the company as advertising, marketing and promotional expense. Accordingly, such items should not be regarded as gifts and the companies should be allowed to recover the input tax paid on purchase/ manufacture of the promotional items. However, given the way the promotional items are marketed, the GST authorities may create disputes on input tax admissibility for these items. Thus, businesses need to re-look at the methodology for offering the promotional items to avoid loss of input tax credit.

Another promotion scheme which gets impacted by the GST law are the vouchers distributed particularly in the FMCG and retail sector which are redeemable against future purchases. The first draft of the GST law, neither provided a definition of voucher nor the principles for determining their taxability. This was however clarified in the final GST law. Section 12(4) of the CGST Act provides that the time of supply i.e. the point in time when GST is payable on supply of a voucher is the date of issuance, if the underlying supply is identifiable at the time of issuance of the voucher. In all other cases, the time of supply is on redemption of the voucher. Having said this, the provisions do not provide when an underlying supply can be said to be identifiable on issuance of the voucher. To elaborate this, there could be situations where a voucher is redeemable against a specific supply (for example a watch), however, the specific State or the specific date when it can be redeemed is not specified. In such circumstances, identifying the place and time of supply of the voucher, which are pre-requisites for determining the tax rate and type (intra-state supply vs. inter-state supply) on the voucher, is uncertain. In view of difference in tax implications for different types of vouchers, businesses may need to re-structure their voucher schemes to avoid any excess/ pre-payment of tax.

The emphasis on the incentive schemes have also increased on account of anti-profiteering provisions. The anti-profiteering provisions mandate businesses to pass on the benefit of reduction in the rate of tax to the end customers. In the retail sector, at times, businesses are faced with situations where there is a change in rate of GST on the goods which are already sold and are available with the distributors or the retailers. In such situations, often businesses resort to offering incentive schemes to the distributors or retailers for ensuring compliance with anti-profiteering provisions.

To summarize, the GST implications for marketing schemes vary depending on the nature and scope of the scheme vis-à-vis provisions of the GST law. While the clarity on taxability of such schemes may emerge in future, at present, it is important for businesses to understand the tax consequences for each scheme and structure them in a way which avoids tax cost or tax credit leakage. Businesses should also ensure that the contracts and related documentation (such as invoices, credit notes etc.) support the tax position adopted.



Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.