Companies approach court over denial for ITC on gifts and free samples

Few companies approached the Hon’ble Gujarat High Court against the government and the indirect tax department over denying input tax credit (ITC) on gifts and free samples offered to customers and clients. Under the system of Goods and Services Tax (GST), companies can set off future tax liabilities with the costs incurred on raw materials or input services. But it denies this benefit on products that are provided as gifts or given free.

Recently, the Gujarat High Court issued notices on the petition of the companies to government and the indirect taxes department and questioned the denial of ITC. The main objective of the GST is to remove the cascading effect of taxes. The company is arguing that restricting ITC on goods that have been written off or disposed of by way of gift or freebies is against the main objective. Therefore, such a restriction will have to cross the bridge of constitutional validity.

Under the current regulations, the pharmaceutical companies are unable to take advantage of the tax credit on free samples offered to physicians or clients. Consumer product firms and others are also unable to take advantage of the tax credit on customised gifts such as the calendars and chocolates they give their clients. Inability to take out credit or set up payment increases overall costs for businesses.

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The section 17(5)(h) of the CGST (Amendment) Act 2018 states that input tax credit can not be used on products lost, stolen, damaged or distributed as gifts or free of charge. It has contributed to many issues for pharmaceutical and consumer goods firms providing free samples and gifts, industry trackers said.

The pharmaceutical companies raised the point that the procurement of gifts and distribution of free samples are a legitimate challenge in the course or furtherance of business, and the denial of credit is not legible.

Earlier, for selling freebies to customers, many pharmaceutical and FMCG firms had come under the taxman’s eye. So it was told companies offering buy-one-get-one-free schemes or 20% extra for the same price to cough up GST on the extra quantities. The tax authorities wanted companies to either pay GST on the additional quantities or reverse the input tax credits.

This issue was later sorted out through a clarification. However, this does not apply to the input tax credit for the free samples and gifts. So, the companies are waiting for a reply in this regard from the government and the indirect taxes department.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in