GST Applicability - Gifts

[Ethirajan Parthasarathy]

GST ON GIFTS

Gift to employees’ worth more than 50K is treated as “supply” and is subject to GST.

Similarly under income tax law Gifts “in kind” in excess of ₹50K received from employer is treated as perquisites and taxed under the head salaries.

Relevant issues :-

1. Whether the company can take ITC incurred on purchase of such Gifts.
2. Such Gifts are taxable under both IT rules and also under section 56(2) (X) of the Income tax.

I presume section 17 will override section 56(2) (X).

3. What should be the accounting entries when tax invoice’s raised for giving away Gift in kind in excess of 50K given to employees on special occasion like Diwali.

[Charu Tyagi]

Answers to queries

1. Gifts by employer to employee on value exceeding ₹ 50,000 will be considered as supply as per section 7 Schedule I of para 2 read along explanation to section 15 of CGST Act (Related Person) and hence ITC will be available.

2. Yes, as per section 17 Rule 3(7)(iv) of Income Tax Act gift from employer is taxable as perquisite.

3. Staff Welfare A/c dr.

To Cash/Bank

[Padmanathan KV]

In my opinion, ITC will not be available on purchase of gifts as it is specifically blocked under section 17(5)(h):-

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

In Income Tax Law,

Any income received by employee from the employer in the course of employment will be taxable under the head "income from salary". Hence, gift will be taxable under head perquisite.

[KASTURI SETHI]

Indirect tax and direct tax cannot be correlated. I agree with both experts.

[Charu Tyagi]

As per my opinion section 17(5)(h) blocks ITC on gifts when they are given to distributor and consumers

Gift by Employer to Employees (Employer-Employee relationship) specifically covered by schedule 1 where value of gift in excess of Rs 50,000 will be treated as supply and hence ITC will be available to such employer.

[Padmanathan KV]

Learned Charu ji,

Kindly help me understand how section 17(5)(h) differentiates between distributors, customer and employee as the provision only states "disposed of by way of gift".

[KASTURI SETHI]

The elements of 'free' 'without payment' in 'gift' exist even after crossing the limit of Rs.50, 000/-

[Charu Tyagi]

agree with you both,

just got puzzled due to specific point covered under the Act for employer and employee.

"It's really good to learn something" 😊

[Amit Agrawal]

My take:

A. Gifts (i.e. supply of goods / services / both without consideration) exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall be treated as supply of goods or services or both, in view of serial No. 2 of Schedule - I read with Section 7 of the CGST Act, 2017.

B. ITC is not available against "goods" (here, there is no mention of services) which are disposed of by way of gift, in view of Section 17 (5) (h).

C. While both of above legal provisions are crystal clear, it does NOT mean, in my humble view, that tax-payer needs to do BOTH i.e. pay taxes against gifts (goods) to employee as 'outward supply' in view of serial No. 2 of Schedule - I read with Section 7 of the CGST Act, 2017 as well as not to take ITC against very same goods in view of Section 17 (5) (h).

C1. The way, I read these two legal provisions, in my view, payment of taxes against gifts (goods) to employee as 'outward supply' in view of serial No. 2 of Schedule - I read with Section 7 of the CGST Act, 2017 itself means 'reversal of ITC' - fulfilling the requirement of Section 17 (5) (h) - simultaneously.

C2. This is more so because employee will not take ITC against outward tax so charged & paid by the employer. Furthermore, being related party transaction without consideration, value of outward supply will be market price (i.e. purchase price, generally specking) resulting into outward tax liability equal to ITC claimed against goods (i.e. gifts) involved.

C3. In other words, there can NOT be double loss (i.e. payment of outward tax as well as loss of ITC) to the tax-payer / employer against gifts given to his employees in subject situation under discussion here because payment of outward tax by itself fulfils both requirements of law.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Padmanathan KV]

learned Amit Ji,

You have really brough out a important point that section 17(5)(h) restricts only "goods". However, I am not convinced with the following reasons:

C.1. In the absence of specific provision to this effect, can payment of tax on an "activity deemed to be supply" under section 7 read with Sch 1 be considered as "reversal of credit" in compliance with section 17(5)?

ie. Where the levy of tax on supply itself is through a deeming fiction, can that deeming fiction be stretched to say it is reversal of credit?

More over, when the wording of section 17(5) are very clear and unambigous, can such an interpretation survive?

Finally, Doesn't legislature has prerogative to tax something at the same time also to deny input tax credit?

Quoting you 'there can NOT be double loss' - Isn't Equity and Tax strangers?

[Amit Agrawal]

@ Shri Padmanathan Ji,

Both provisions are constitutional and my views are not based on challenging validity of any of these provisions.

I hold the view that requirements of both provisions are duly & fully satisfied by paying applicable taxes on deemed outward supply to the employer by the employer.

Another way of looking at these provisions is that when law treats the same as outward supply on deeming basis, very same activity cannot be called as 'goods disposed of by way of gift' under very same law (i.e. GST).

Either way, there cannot be double-loss to the employer, in my view.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Shilpi Jain]

The moment the gift given to employee is liable to GST credit will be eligible. I agree that there cannot be double loss, i.e. pay tax plus reverse credit.

This aspect was also clarified by way of a circular/a press release.

[Ethirajan Parthasarathy]

Dear All,

I am thankful to everyone for lovely discussion on query posted by me.

Yes. Circular no 92/11/2019 F NO 20/16/04/2018 GST date 7/3/2019 provides for ITC credit on Gifts to employees once it is treated as deemed supply.

Thanks to Ms.Shilpa for drawing attention to this.

While purchase of Gift, we debit staff welfare and credit Bank/Cash. My related query is about entry to be passed when tax Invoice is raised for deemed supply of Gift to employees.

Thanks in advance

[Padmanathan KV]

Dear sir,

Thank you for drawing my attention towards the Circular.

I stand corrected.

Regards

[KASTURI SETHI]

.Sh.Padmanathan Kollengode Ji,

At serial no.13, you said, "I stand corrected." You were not incorrect.

You have jumped to the conclusion. In order to know 'how you were not incorrect' , please penetrate into the legal definition of the term, 'gift' and meaning of the phrase, 'gift or free samples' used in Section 17(5)(h) of CGST Act viz-a-viz all the replies of Sh. Amit Agrawal Sir, word for word again. The issue is not out of your reach.

To be 100% fool proof, this issue requires further x-ray examination.

[KASTURI SETHI]

Is it really a gift or incentive or discount in any form ?

Does deemed supply exist in this scenario ?

Is transaction value/ price effected by such giving such gift in any way ?

[Amit Agrawal]

@ Shri Kasturi Sethi Ji,

If you still feel that there can be double-loss to the employer (i.e. pay tax plus reverse credit) in the situation under discussion here, kindly elaborate your views with cogent reasoning please.

Otherwise, let's treat the issue as closed as humbly done by Shri Padmanathan Ji.

[KASTURI SETHI]

Dear Sir,

My issue is not of 'double loss'. Discussion on this forum is already prolonged too much. Let us close here. So I shall send personal message to you through TMI.

Thanks a lot.

[KASTURI SETHI]

Also see Issue ID = 118656 in this context. 'ITC' on lottery gifts'

AI Summary

Deemed supply of gifts: GST applies to employer-to-employee gifts, affecting input tax credit and perquisite taxation.
Gifts from an employer to an employee exceeding the statutory high-value threshold are treated as deemed supply for GST, attracting GST and allowing the employer to claim input tax credit on purchase of such gifts; concurrently, such gifts are taxable as perquisites under income-tax law. Conflicting GST provisions that block ITC on goods disposed of by way of gift have prompted debate, but administrative clarification supports ITC availability when the gift is a deemed supply, with consequent accounting entries for staff welfare and recognition of outward supply tax invoices.