A recent ruling by the Authority for Advance Rulings (AAR) has held that GST will have to be paid on the products that are being given off as free gifts by companies.

The ruling said that supply of goods such as gold coins, refrigerators or air conditioners under promotional schemes should be treated as normal supply and GST should be levied on the whole amount.

Often companies come up with these schemes for their retailers too to push sales.

In other cases, these promotional goods and schemes are for the end customers—in both cases GST will come as a spoil sport following the AAR ruling, say tax experts.

“What qualifies as ‘gift’ in a sales promotion scheme has been a matter of debate,” said Harpreet Singh, partner-indirect taxes at KPMG in India. “Although this ruling accepts the fact that promotional items supplied for nominal consideration along with the main product cannot be considered as gifts, it may trigger another debate on the value at which such promotional items should be charged to tax.”

In a case, the West Bengal AAR said supply of goods at a nominal price to retailers against purchase of specified units of hosiery goods pursuant to a promotional scheme would qualify as individual supplies taxable at the rates applicable to each of such goods as per Section 9 of the GST Act.

AAR further held that the promotional items cannot be considered as gifts since they are given at a consideration.

“Promotional schemes before festivities are in vogue. It would be good, if suitable clarification with clear principles on what qualifies as ‘gift’, ‘discount’, ‘sample’ etc is issued so that companies are able to use promotional schemes to enhance their business, without overly worrying about adverse tax implications,” said Singh.

In the past, pharmaceutical companies offering buy-one-get-one-free schemes or 20% extra for the same price had an issue with the tax department.

The indirect tax department had begun investigations and sought details of incentives given to distributors, stockists and customers by about 30 companies about two years back.

The AAR ruling also offered clarity on the input tax credit available on these free gifts doled out by companies either to their retailers or customers. AAR held that the credit of the input tax paid on the items being sold at nominal prices would be available.

Input tax credit is basically GST paid on input services or raw materials that can be set off against a certain kind of future tax liability.

The issue with gifts or goods given free or at nominal price is that of valuation. That is how one values these “free gifts” whether for GST or for input tax credit, say tax experts.

For instance, gold coins, refrigerator, mixer grinder, cooler or air conditioners are often given to customers or retailers by companies if they buy a particular quantity of goods (or above a certain threshold of price).

The question is how does one value such goods under GST, say tax experts.

AAR said that the value of the said goods should be determined as per provisions of the valuation principles given under the law since price is not the sole consideration for the supply of promotional items. This could lead to additional litigation going ahead as this jumble up how to value these gifts and the tax credit for some companies, say experts.