One of the important issues related to promotional schemes is availability of input tax credit (ITC) of tax paid on procurements made for promotional schemes. While the term ‘business’ has been defined under the Central Goods and Services Tax Act, 2017 (the CGST Act), there is no definite yardstick to find out whether an activity is carried out ‘in course or furtherance of business’.
The advance ruling in M/s. Myntra Designs Private Limited (Myntra)case is an important example of such an anomaly in law. Myntra hadsought advance ruling on availability of ITC on vouchers and subscription packages procured from third-party vendors. Myntra proposed to run a loyalty program, by way of issuing loyalty points to the customers on fulfilment of certain terms and conditions. Such loyalty points, which are non-transferable, and have no monetary value, are redeemed by customers for vouchers and subscription packages. The Karnataka Authority for Advance Ruling (AAR)heldthat redemption of loyalty points by customers for receiving vouchers from Myntra implies that the vouchers are issued free of cost to the customers and amounts to disposal of vouchers by way of gift, which is blocked credit under Section 17(5)(h) of the CGST Act.
Now, in commercial sense, any activity that expands the business, including marketing and promotional schemes, would deem to be in the course or furtherance of business. In the present case, introducing a loyalty program whereby customers can redeem loyalty points for vouchers and subscription packages is essentially a marketing initiative to promote the e-commerce platform of Myntra, which would help in broadening the customer base and also, increase the commission earned by Myntra by way of supplier listing. The vouchers and subscription packages are neither a gratuity nor an act of generosity. For something to be termed as a gift, it must be unconditional, but since the offer is not available to each and every customer and requires quid pro quo from customers to fulfill the term and conditions for becoming eligible to participate in the loyalty program, it does not come within the ambit of ‘gift’. Accordingly, the said Ruling has completely ignored the purpose behind issuance of vouchers and subscription packages, which are provided to the customers in course or furtherance of business only, and definitely not as a ‘gift’.
Further, there have been several Advance Rulings on similar issues wherein ITC of goods and services procured for business promotional schemes have been rejected. The Appellate Authority for Advance Ruling (AAAR), Tamil Nadu in the case of GRB Dairy Foods Pvt Ltd. , has held that gifts or rewards given without consideration even when given for sales promotion do not qualify as inputs for the purposes of ITC, since no GST is paid on its disposal. In another decision of Biostadt India Limited, the Maharashtra AAR held that in absence of any agreement signed by the customers, promotional scheme could not be considered as a contractual obligation and thus, was ‘gift’.
However, in this context it is also interesting to highlight another decision of Maharashtra AAAR in the case of Sanofi India Limited, where no advance ruling could be issued due to difference in opinion among the members. One member (SGST) upheld the order of AAR opining the goods distributed free of cost are in nature of gift, while the other member (CGST) set aside the order of the AAR, ruling in favour of the Appellant, opining that the promotional scheme was designed with the sole purpose of furthering the business, driven purely by commercial intention, and accordingly, categorising the goods and services procured as ‘input’ and ‘input services’.
From the above rulings, it is evident that traditional promotional schemes can be broadly divided into two categories. Firstly, target based promotional schemes, where incentives are given upon fulfilment of certain sales targets; and secondly, where promotional items are given free of cost as a marketing gimmick. In both these types of schemes, owing to the lack of clarity in law, ITC has been consistently denied by the Authorities. Furthermore, on analysis of Myntra case, it is observed that there is a promotional scheme different from the schemes offered by conventional businesses, whereby the customers earn points for every purchase they make, and such points can be redeemed to get vouchers and subscription packages. There is neither any element of fulfilling sales targets, nor any products being supplied free of cost. To earn points, a customer has to purchase items.The entire conundrum here is due to the fact that the term ‘Gift’ is not defined under GST law. So, reliance may be taken from other legislations such as the Gift Tax Act, in terms of which Gift is a “transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth”. Thus, ‘Gift’ is a voluntary act which does not involve consideration. Further, there is also an absence of any contractual obligation behind such gifts which are either in the nature of vouchers, points or in some cases free gifts. Further, it also becomes imperative to note that in terms of input or input service in GST laws the only criteria is the same, i.e., being used or intended to be used by a supplier in the course or furtherance of business.
There is no doubt that goods or services used for promotional activities are meant for the ‘business’ or rather growing the business and qualifies as being used ‘in course or furtherance of business’. Thus, denial of ITC of tax paid on such items/ activities on the ground that they are provided free of cost or because there is no output tax on such items/ activities or there being no agreement signed between the parties are completely unjustifiable specially in today’s online marketing schemes. The vouchers/ loyalty points, etc., goods or services must qualify as ‘input’ and ‘input services, on which ITC should be available to the companies.
Under the light of existing perplexities on the issue, the Central Board of Indirect Taxes and Customs (CBIC) has issued a Circular providing clarification on the aspects of taxability, valuation and availability of ITC in the hands of the supplier in relation to few promotional schemes. However, in today’s dynamic business environment, where companies introduce innovative ways of promoting their businesses, the Circular issued by CBIC is not sufficient to cover all promotional schemes considering the various kinds of businesses. In today’s trend, it is important that there should not be restrictions on the availability of ITC on expenses incurred on such promotional activities, and promotional schemes should be subjectively analysed keeping in mind the intention behind the implementation of such schemes. Denial of ITC adds to the burden of business and increases the cost of products or services, the brunt of which is eventually borne by the customers and accordingly this issue must be evaluated by the GST authorities with a moderate view.
Smita Singh (Partner), Megha Tewari (Principle Senior Associate), and Kaushal Jaisalmeria (Associate)- IDT Team at S&A Law Offices.
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