The issue of whether Input Tax Credit (ITC) is admissible on goods and services used for promotional expenses has been a long-standing point of contention under the Goods and Services Tax (GST) regime. For years, businesses have sought clarity on whether they can claim ITC for promotional items like T-shirts, carry bags, display boards, and other marketing materials. Recently, the Karnataka bench of the Authority for Advance Ruling (AAR) brought a fair conclusion to this debated issue, offering much-needed guidance on the subject.

In the most recent ruling, the AAR clarified that ITC would indeed be available on GST paid for promotional expenses, but with specific conditions and limitations. This ruling addresses both the challenges and opportunities faced by businesses in the fast-moving consumer goods (FMCG) and retail industries, particularly those engaged in brand promotion and sales growth activities.

Background of the Case

The issue arose when Bengaluru-based Page Industries, a well-known manufacturer and distributor of the ‘Jockey’ and ‘Speedo’ branded products, sought an advance ruling from the AAR. The company wanted clarification on whether promotional products and marketing items, such as T-shirts, display boards, carry bags, and uniforms, could be considered ‘inputs’ under Section 2(59) of the CGST Act, 2017.

Page Industries purchased these promotional items to market and promote its brand. As part of its promotional strategy, it distributed these items to related parties, franchises, and retail outlets. The question that arose was whether the GST paid on these items could be claimed back as ITC since they were used exclusively for business purposes and not for personal use or as gifts.

The AAR Ruling: A Turning Point

In a landmark ruling, the AAR held that Page Industries was indeed eligible to claim ITC on GST paid for the procurement of promotional goods, such as display boards, posters, carry bags, and uniforms, as these were essential for promoting the brand. The ruling emphasized that these goods, once distributed to related parties, formed part of a taxable supply, which makes them eligible for ITC under the GST Act.

The key points from the ruling were as follows:

Eligibility of ITC for Promotional Goods: The AAR decided that promotional goods procured for business purposes, such as brand promotion and marketing, are eligible for ITC if they are distributed to related parties like franchises and outlets. This decision allowed businesses to recover the GST paid on promotional materials, which are part of their core marketing strategy.

Prohibition on ITC for Gifts and Free Samples: However, the AAR ruling also clearly differentiated between items distributed to related parties and those given as gifts or free samples. ITC is not admissible on goods disposed of as gifts or free samples to retailers, customers, or other non-related parties. This restriction aligns with the intent of GST law, which aims to prevent businesses from claiming input credits for goods that do not directly contribute to taxable business activities.

The ruling also recognized the growing importance of promotional activities in driving sales and the need for a tax framework that supports such efforts without penalizing businesses for promoting their products.

The Debate on ‘Related Parties’ and ‘Gifts’

While the AAR’s ruling provided a comprehensive answer, some aspects of the case remain open to debate. One key issue that arose during the hearing was whether franchisees should be considered “related parties” under the GST Act. While the ruling clarified that ITC would be available when promotional items are distributed to related parties, it did not offer a definitive solution to the question of franchise relationships.

The GST Act specifies that ITC is available only when goods are supplied to “related parties,” which raises the issue of whether franchisees and outlets that sell the branded products are sufficiently linked to the manufacturer to qualify as related parties. This remains a grey area and could result in differing interpretations across various businesses.

Recent Developments: A New Twist

As with many legal matters in the tax landscape, the situation continues to evolve. Just when businesses were beginning to embrace the AAR ruling, the High Court of India recently dismissed a petition challenging the denial of ITC for goods purchased for sales promotion. This latest ruling, dated December 7, 2024, further complicates the issue by affirming the denial of ITC on promotional products, such as T-shirts and gold coins, under Section 17(5)(h) of the GST Act.

The High Court’s decision was based on the interpretation of Section 17(5)(h), which specifically prohibits ITC on goods disposed of by way of gifts or free samples. In this case, the petitioner had purchased promotional goods that were subsequently given as gifts or free samples to customers. The court ruled that these items could not be classified as eligible for ITC since they were not part of a taxable supply but were instead used for promotional purposes without generating any taxable output.

This ruling reminds us that ITC cannot be claimed on promotional items that are freely distributed without any expectation of direct sales or business return. The distinction between promotional goods distributed for business purposes and those given away as gifts is critical when claiming ITC.

Key Takeaways for Businesses

These conflicting rulings highlight the complexity of claiming ITC on promotional expenses under GST. While the AAR’s ruling in favor of ITC on promotional goods is a welcome development for businesses looking to reduce their tax liabilities, the High Court’s recent decision highlights the importance of adhering to the finer details of the law.

For businesses, especially in sectors like FMCG, retail, and e-commerce, the following key takeaways are critical:

Understand the Purpose of the Promotional Goods: Ensure that the items you are claiming ITC on are used directly for taxable business purposes and are not gifted or given away without any business intent. The distinction between promotional materials and gifts or free samples is crucial.

Maintain Proper Documentation: Keep a clear record of how the promotional goods are distributed and ensure that they are sent to related parties or business associates who contribute to the overall supply chain.

Stay Updated on Legal Changes: Given the evolving nature of GST laws and judicial interpretations, it is essential for businesses to stay informed and seek timely rulings if they have any doubts about their eligibility for ITC.

Evaluate Franchise Relationships: Businesses that distribute promotional items to franchisees should review their agreements and relationships to determine whether franchisees qualify as related parties under the GST framework.

Conclusion

The issue of ITC on promotional expenses has been a point of ambiguity for many businesses. The AAR’s ruling offered clarity, but recent developments, such as the High Court’s dismissal of a petition on promotional goods, show that the legal landscape continues to evolve. Businesses must carefully navigate the complexities of GST regulations to ensure compliance and maximize their input tax credit claims. As the GST framework continues to adapt, understanding these nuances will be essential for businesses looking to grow while maintaining a strong tax position.

Base Ref: https://njjain.com/articles/itc-can-be-claimed-on-the-gst-paid-for-distributable-promo-merchandise/

Updated information ref: https://www.taxmanagementindia.com/web/tmi_highlights_details.asp?id=83779