Taxability of Gifts to Dealers/Sub-Dealers Under GST

[Ramanathan Seshan]

Dear experts,

Company A provides gifts to its dealers and sub-dealers during festivals, upon achieving certain sales targets, or when new branch stores are opened/expanded.

Would such gifts be considered taxable under GST, especially considering that the definition of 'consideration' includes any inducement for a supply? If they are indeed taxable, how should these be disclosed in GSTR-1?

[Sadanand Bulbule]

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

Entry No 2 of the First Schedule to the CGST Act reads as under:

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

Further  in terms of Section 17[5][h], ITC on the value of gifts needs to be reversed.

[YAGAY andSUN]

2023 (9) TMI 126 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA

[YAGAY andSUN]

In the context of GST, whether gifts given by Company A to its dealers or sub-dealers are taxable depends largely on the intention and the terms under which those items are given.

According to the Authority for Advance Rulings (AAR), Karnataka, in the case of M/s. Orient Cement Limited (2023 (9) TMI 126 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA), gold coins given to dealers for achieving pre-set sales targets were not considered "gifts". The AAR clarified that since these coins were linked to specific performance milestones, they formed a business obligation or incentive, and not a voluntary or gratuitous transfer.

As a result:

• Such items are considered taxable supplies under GST, even if no money changes hands — because the performance (like achieving a sales target) acts as a non-monetary consideration.

• Since these items are not "gifts" under Section 17(5)(h) of the CGST Act, input tax credit (ITC) is allowed on them.

• Company A must issue a tax invoice based on the fair market value of the item and disclose it in GSTR-1 under the appropriate section (B2B or B2C), depending on the recipient.

This approach ensures alignment with GST principles of supply-for-consideration, even in non-cash transactions, and gives clarity on when ITC is admissible.

This analysis is based on the Advance Ruling by AAR Karnataka in IN RE: M/s. Orient Cement Limited – 2023 (9) TMI 126, which interpreted Section 17(5)(h) of the CGST Act, 2017.

*** 

[Sadanand Bulbule]

True Sir. As long as the transaction is held to be taxable supply of goods, ITC is entitled. Section 17(5)(h) comes into play in otherwise “gifts” falling outside the domain of supply of goods under Section 7. I welcome your point. 

[Ramanathan Seshan]

Dear Yagay-sir,

Thank you for your detailed response.

Regards,

S Ram

[Ganeshan Kalyani]

Sir, this can also be routed thru credit note as per section 34 if the discount is given in the guise of gifts. Otherwise, reverse the input tax credit as per section 17.

[Shilpi Jain]

Gift is of goods or services?

Whether the fact of providing these gifts is known before-hand and is an obligation to provide them?

Further facts would be required to be answer your query.

Refer to this article if useful ----> https://www.taxtmi.com/article/detailed?id=8835

[Ramanathan Seshan]

Dear Shilpi-mam,

The kind of gift that we are going to provide the dealer or sub dealer is not known in the front. But the fact on achievement of certain targets, they would be given a gift is known upfront i.e when a dealer or sub dealers on boards the company.

Regards,

S Ram

[YAGAY andSUN]

In this case, where the gift to dealers or sub-dealers is not specified at the outset but is based on achieving certain predefined targets, it is important to ensure that the nature of the gift and the criteria for earning the gift are clearly outlined, even if the exact gift is determined later.

Here’s how you can structure this arrangement legally and operationally:

1. Transparent Communication of Terms and Conditions:

• Clear Communication Upfront: Even if the exact gift is not known, you must communicate the following to the dealer or sub-dealer upfront:
  • Target Milestones: Define the sales targets, performance metrics, or any other criteria that must be achieved to qualify for the gift.
  • General Description of the Gift: While you may not specify the exact gift, you should describe the general nature of the gift. For example, "A gift in the form of electronics, vouchers, or other incentives."
  • Eligibility Criteria: Ensure that the dealers or sub-dealers understand how their performance will be evaluated, when the assessment will occur, and what the rewards will be contingent on.

2. Documenting the Reward Scheme:

• Formal Agreement or Terms and Conditions: In order to avoid disputes, it's advisable to have a written agreement or terms and conditions document outlining the general structure of the reward system. This could include:
  • Performance Period: The period over which targets will be evaluated (e.g., quarterly, annually).
  • Flexibility Clause: Since the exact gift is not known upfront, include a clause stating that the company reserves the right to determine the exact nature of the gift, within certain reasonable limits (e.g., “The gift will be determined by the company, which will be of equal or greater value than the listed range of potential rewards”).
  • No Cash Equivalent Clause: If you do not want to offer cash instead of the gift, make sure that your terms state that the gift will not be redeemable for cash.

3. Tax Implications:

• Gift Tax and GST: While providing gifts, be aware of the tax implications under Income Tax Act and GST Law.
  • If the value of the gift exceeds a certain threshold, it could be considered as a perquisite under income tax, subject to tax in the hands of the dealer or sub-dealer.
  • GST: Depending on the nature of the gift, if it qualifies as a "reward" or "incentive" for a transaction, there could be GST implications on the supply of the gift. Gifts provided without consideration may fall under the definition of "goods" under GST, which may require GST to be paid by the company.
  • Threshold Limits: Gifts exceeding a certain value (as defined under the Income Tax Act) may be subject to TDS (Tax Deducted at Source), so it is crucial to check if the gift qualifies as a taxable event under Section 28 of the Income Tax Act, 1961.

4. Gift Selection Flexibility:

• Vouchers or General Goods: As long as you clearly communicate the range or type of items that could be given as rewards, the flexibility of determining the gift later is acceptable. Gift cards, vouchers, or items from a pre-approved range of goods can work well here. This would also ensure that the dealer or sub-dealer receives something of value, but within the company’s predefined range.
• Personalized Selection: You may also consider using a system where the recipient can choose the gift within a certain budget range. This allows flexibility while still ensuring the gift aligns with their preferences.

5. Ethical Considerations:

• No Coercion or Misleading Offers: Ensure that the targets or criteria for receiving the gift are realistic and achievable, avoiding any possibility of false advertisement or misleading inducements to dealers.
• Fairness and Transparency: The process for distributing the rewards should be consistent and fair across all dealers and sub-dealers to prevent any future claims of discrimination or unfair practices.

6. Tracking and Monitoring:

• To ensure that the reward system is not misused or misunderstood, it would be beneficial to:
  • Keep detailed records of targets and achievements.
  • Use a performance dashboard or regular updates to show the dealer's progress toward the goal.
  • Inform the dealers of their standing and the reward they would be eligible for periodically to avoid any confusion.

7. Final Recommendations:

• Clarity in Communication: Even if the gift is not fixed, communicate the scheme clearly.
• Legal Compliance: Ensure compliance with tax laws, including GST and income tax.
• Maintain Documentation: Keep written agreements and records to avoid any future disputes regarding the gift or reward.
• Flexibility with Limits: Provide flexibility in choosing the gift but ensure there are reasonable boundaries.

This approach will help maintain transparency, prevent potential legal disputes, and ensure that the gift system runs smoothly while also aligning with business objectives.

[Shilpi Jain]

Gifts given at the time of onboarding - prima facie, highly disputable if ITC availed. Though you could consider getting your schemes reviewed and take suggestions professionally before concluding on the ITC.

AI Summary

Performance-Based Dealer Incentives Taxable as Supplies: GST Compliance Requires Transparent Valuation and Documentation Legal Analysis Summary:A company provides performance-based gifts to dealers and sub-dealers upon achieving specific sales targets. Under GST regulations, these gifts are considered taxable supplies, not voluntary transfers. The gifts must be disclosed in GSTR-1 based on fair market value. Input tax credit (ITC) may be allowed if the gifts are linked to business performance milestones. Companies must ensure transparent communication of reward criteria, maintain proper documentation, and comply with tax implications under GST and income tax laws.