Input Tax Credit on RCM Paid for Transportation of Gifts

[Ramanathan Seshan]

Dear Experts,

Company A purchases gifts to distribute to its dealers during festive occasions. The GST paid on the procurement of these gifts is not eligible for input tax credit (ITC), as they are considered gifts under GST law.

However, for transporting these gifts from one location to another, the company hires a transporter and pays GST under the Reverse Charge Mechanism (RCM).

My question is: Can Company A claim ITC on the GST paid under RCM for the transportation of these gifts, even though the gifts themselves are ineligible for ITC?

Regards,

S Ram

[Sadanand Bulbule]

In terms of Section 16[1] read with Section 17[5][h] of the CGST Act, ITC paid under RCM for the Transportaion of free gifts is not available.

[Ramanathan Seshan]

Thanks sir

[Shilpi Jain]

This transportation expense is a business expense and if the business is for making taxable supplies, this is an eligible credit. What is blocked u/s 17(5)(h) is only ITC on the goods given away as free samples or gift. No restriction on any service involved in such free gifts distribution.

 

[Shilpi Jain]

Also these goods given away as promotion material are not exempt supply but are actually an expense incurred for the taxable supplies - being the end use. So applying the end use theory one could take a view that reversal in terms of Rule 42 will also not apply. This is prone to dispute from department though.

[Ramanathan Seshan]

Thanks mam

[KASTURI SETHI]

Q.  Can Company A claim ITC on the GST paid under RCM for the transportation of these gifts, even though the gifts themselves are ineligible for ITC ?

Ans. Two supplies are involved and these are

(i) GTA Service

(ii) Supply of goods as gift.

ITC on GTA is allowed. It is natural that outward supply must be taxable.

[Ramanathan Seshan]

Thanks sir

[KASTURI SETHI]

An illustration : A petrol pump dealer gets inward supply of non-GST goods i.e. petrol, diesel etc. through GTA but that dealer also supplies outward taxable supply of goods and services. Lubricants and space for advertisement. (taxable). In this scenario, ITC on GTA service is admissible.

[Sadanand Bulbule]

In terms of Section 49[4], ITC may be used to pay output tax liability. As such there is no one to one link between the source of ITC and its utilisation, subject to the restrictions imposed under Section 17 of the Act.

[Ramanathan Seshan]

Dear Sadanand-sir,

Does this mean that ITC can be availed ?

[Sadanand Bulbule]

 Dear Sir

Obviously, if there is taxable supply in the course of regular business.

[Fahiyaz Ahmmed]

The government has blocked ITC on gifts under Section 17(5)(h) of the CGST Act. The idea is simple: if the supply is not for business or does not generate tax revenue, then no ITC benefit should be granted. 

But in these cases, where there is a clear business connection and the distribution of gifts forms part of a business promotion or strategy, a strong argument can be made that the associated services, such as transportation (even if paid under RCM), are being used in the course of or furtherance of business.  ITC on the GST paid under RCM for transportation services may be claimed, as the expense is business related, even if the ITC on the actual gift items themselves remains blocked.

[KASTURI SETHI]

No one-to-one correlation is required among inputs, input services and final products. Section 16 of CGST Act does not require one-to-one relation------------AAAAR-Gujarat. In reference Aristo Bullion Pvt. Ltd. - 2022 (1) TMI 1056 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT

[Ramanathan Seshan]

Dear sir,

Thanks for your response. I shall revert with further queries. if any, after reading the advance ruling.

Regards,

S Ram

[Ramanathan Seshan]

Dear Kasturi-sir,

If my reading and understanding of the AAAR is correct the following points help us claim ITC:

1. The law does not mandate a one-to-one correlation between particular inputs and specific outputs for the utilization of credit.

Hence, we can conclude that transportation services used for transport of goods is eligible ITC

2. However following question still lingers in my mind, request your clarification:

since there is no furtherance of business caused by movement of gifts in the transportation, will it not deny us ITC ?

Regards,

S Ram

[Sadanand Bulbule]

 

 M/s. Aristo Bullion Pvt. Ltd. - 2022 (1) TMI 1056 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT 

AI Summary

Transportation services for gifts eligible for ITC despite Section 17(5)(h) blocking gift ITC claims A company purchases gifts for dealers during festivals and pays GST under Reverse Charge Mechanism for transporting these gifts. While ITC on gifts is blocked under Section 17(5)(h) of CGST Act, the query concerns whether ITC can be claimed on transportation services paid under RCM. Expert opinions are divided. One view holds that transportation of gifts is ineligible for ITC per Section 16(1) read with Section 17(5)(h). However, another perspective argues that transportation is a business expense for making taxable supplies, making it eligible for ITC since only goods given as gifts are blocked, not associated services. The Gujarat AAAR ruling in Aristo Bullion establishes that GST law does not require one-to-one correlation between inputs and outputs for ITC utilization. Transportation services can be considered business-related expenses used in furtherance of business operations. The consensus leans toward allowing ITC on transportation services despite the gifts themselves being ineligible, as these represent separate supplies with distinct treatment under GST provisions.