Cos can claim credit for GST paid on dealer incentives: AAR

Mumbai: It is not just customers who look forward to the festive season in hopes of discounts and freebies — dealers, too, get target-based incentives, ranging from gold coins to white goods, from manufacturers. In a relief for manufacturers, they will be able to claim credit for the tax paid on purchase of such incentives.

The Authority for Advance Rulings (AAR), Karnataka bench, in the case of Orient Cement that offered target-based incentives to its distributors, has recently held that issuing gold coins or white goods to them on meeting their targets is neither a ‘gift’ nor a ‘permanent transfer or disposal of business assets’.

In other words, the cement manufacturer would be able to claim a credit for the GST paid on purchase of coins or white goods against its own GST liability. At the same time, the AAR also held that transfer of goods under the incentive schemes will be a taxable supply.

“In the past, various benches of the AAR have treated goods distributed free of cost under incentive schemes as a ‘gift’ and have disallowed ITC. While advance rulings do not set a judicial precedent, they have a persuasive effect in tax assessments... to this extent the AAR ruling is a game changer,” said Bipin Sapra, indirect tax partner at EY India.

However, this ruling also stated that the distribution of goods under an incentive scheme, even if made without any consideration, will be a taxable supply, when input tax credit has been claimed.

According to Sapra, this will be akin to a flow-through mechanism. To illustrate, the manufacturer on purchase of gold coins will pay GST and claim input tax credit. Later, when he issues these gold coins to the eligible distributors it will be a taxable supply on which he will pay GST. There will be no double tax as such, the only complexity could relate to valuation at the time of onward issue to eligible distributors.