India: Gifting this festive period – with some GST

published on 15 October 2019 | reading time approx. 2,5 minutes

While the impact of the global slowdown looms heavily on the economy, India is in full preparation to make the most out of the upcoming festive season. Amongst other festivities, Diwali, also known as the festival of lights, will be celebrated towards the end of the October, 2019. The season of celebration, prayers and joy inter alia, involves business houses procuring gifts to be shared with clients, stake holders and employees.

The gifting tradition is at it’s all time high during festive periods in India. While the person making and receiving the gift exchange warm wishes and gratitude, the tax team carefully monitors the said activity to understand and safeguard their tax positions. One cannot argue that even the activity of gifting by business houses to its clients and employees, is in the course or furtherance of business. Gifting on festivities is also a gesture to honour stake holders for their continued support towards the business.

Procurement of goods for gifting purposes, such as apparels, cutlery, confectionary items, etc., involves an element of cost loaded with Goods and Services Tax (“GST”). Payment of GST on procurements is generally available as input tax credit so long as it can be proved that the goods or services procured are used in the course or furtherance of business. However, the GST law in India is drafted in a way so as to restrict certain input tax credits on the procurement side which includes goods that are procured and disposed off as gifts. Accordingly, where certain goods are procured and given away as gifts, credit of GST paid on their procurement will not be available, despite that the same may be proved as in the course or furtherance of business.¹

In order to understand the rigours of the said provision, it will be imperative to understand the meaning of ‘gift’. The term ‘gift’ has not been defined in the Indian GST law. A ‘gift’, as understood in common parlance, is giving away something out of one’s own volition and without having any sort of contractual obligation. The concept of quid pro quo (something against something in return, to simply put) is mostly absent in case of gifts. The term ‘gift’ was defined under the Gift Tax Act in India (when the enactment was in force) to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth. The definition is somewhat indicative of the absence of the concept of quid pro quo.

It will here be important to mention that if the agreement between the parties is such that there will be an exchange of goods under a contractual obligation, the same may not qualify as gifts from either side. Rather, the same may be treated as a taxable supply under the GST law, if it is in the furtherance or course of business. Additionally, there may be cases where goods (such as watches, luxury pens, perfumes, etc.) are offered for free upon meeting certain targets (volume based, value based etc.). In such cases, the giving away of such goods may not qualify as gifts for the reason that they are given under a contractual obligation and not on voluntary basis. Moreover, when agreed in advance, the recipient also acquires a legal right to claim such goods and demand specific performance of the agreement. A view is possible that as the above transactions does not qualify as gift, there should be no requirement to reverse the input tax credit of GST paid on their procurement. However, in absence of clarity, litigation with the revenue authorities in this regard cannot be ruled out.

Coming back to the issue of gifting during festivities, gifts are generally offered voluntarily and in order to delight the recipient. Neither is there any contractual obligation nor any legal right to claim such gifts. Accordingly, giving away of goods during festive season may qualify as ‘gifts’ and as a corollary, input tax credit of GST paid on their procurement may not be available thereby, making it a cost for the business.
 

Enterprises should be careful in identifying such transactions and clearly distinguishing cases where gifts are offered voluntarily or under a contractual obligation. An analysis should be made of transactions that qualify as gifts and those which do not qualify as gifts in order to avoid resulting GST liabilities and interest/ penal consequences.

¹ Section 17(5)(h) read with Section 16 of the CGST Act, 2017 (as amended).