Companies take taxman to court over denial of GST credit on gifts

MUMBAI: A group of companies has dragged the government and the indirect tax department to court over denying input tax credit on gifts and samples given to customers and clients.

Under the Goods and Services Tax (GST) framework, companies can set off costs incurred on raw materials or input services against future tax liabilities. However, it denies this benefit on goods distributed as gifts or given free.

The Gujarat High Court on Wednesday issued notices to the government and tax department on the companies’ petition challenging the denial.

“The restriction of input tax credit on goods written off or disposed of by way of gift or free samples is against the main objective of GST that there should not be any tax cascading and hence such a restriction will have to cross the bridge of constitutional validity,” said Abhishek A Rastogi, partner at Khaitan & Co, who is arguing for the companies in the court.

As per the current regulations, pharmaceutical companies cannot avail of tax credit on free samples given to doctors or their clients. Consumer product companies and others are also unable to avail tax credit on customised gifts such as calendars and chocolates they give to their customers. Inability to take credit or set off cost drives up companies’ total costs.

Section 17 (5) (h) of the CGST (Amendment) Act 2018 says input tax credit “cannot be availed on goods that are lost, stolen, destroyed or distributed as gifts or for free”.

This has led to a lot of problems for pharma and consumer goods companies that distribute gifts and free samples, industry trackers said.

“Procurement of gifts and distribution of free samples are in the course or furtherance of business and, hence, denial of credit is a legitimate challenge,” Rastogi said.

Earlier, several pharma and FMCG companies had come under the taxman’s lens for dishing out freebies to consumers. So, companies offering buy-one-get-one-free schemes or 20% extra for the same price were asked to cough up GST on the extra quantities. The tax authorities wanted companies to either pay GST or reverse input tax credits on the extra quantities.

This issue was later sorted out through a clarification. This, however, doesn’t apply to input tax credit for the free samples and gifts, tax experts said.