AAR allows GST input tax credit to manufacturer on certain promotional materials provided to franchisees, distributors and retailers

 

This Tax Alert summarizes a recent ruling^[1] of the Karnataka Authority for Advance Ruling (AAR). The issues involved were whether the materials used for marketing and promotion of brand can be considered as inputs and tax paid on procurement can be availed as input tax credit (ITC).

 

Applicant had transferred goods to franchisees, distributors and retailers free of cost to promote its brand and market its products at point of purchase.

 

AAR observed that such goods can be divided into two categories, non-distributable goods and distributable goods.

 

Non-distributable goods like hoardings, where the ownership is retained by the applicant, are capitalized in the books of account and are not a direct cost to the products sold. Thus, they qualify as capital goods and not as inputs under GST. ITC can be claimed in respect of such goods. In case they are subsequently destroyed or written off, ITC has to be reversed.

 

Distributable goods (where the ownership is transferred) such as carry bags, gifts, etc. when provided to franchisee without consideration shall be treated as supply since it is a related party transaction. While ITC can be claimed, the applicant needs to pay tax on the outward supply.

 

Distributable materials provided free of cost to distributors and retailers does not qualify as supply under GST and will be treated as “gift” basis Circular No. 92/11/2019–GST dated 7 March 2019. Thus, ITC cannot be claimed due to the restriction provided in Section 17(5) of CGST Act.

 

Comments

 

The ruling provides clarity on the key parameters to be kept in mind while claiming ITC on promotional and marketing materials.

 

The ruling highlights that in case where the capital goods are lost or destroyed, the credit needs to be reversed as per rule 43 of CGST Rules.  Earlier, there was a dilemma on the quantum of reversal since rule 43 is not linked to section 17(5).

 

The cost of promotional items supplied free of cost to either franchisees or other retailers is factored in the cost of the overall business on which GST is paid by the businesses. Hence, ideally no GST should be applicable on such free supplies whereas ITC on procurement should be available.  The law may need to be appropriately amended to facilitate manufacturers who engage in such promotional activities.