Namaste DOST!

I hope you are doing fine and this blog finds you in the best of your health.

We write to you with a lot of shock and surprise after the judgement of the Appellate Authority of Advance Ruling, Karnataka, in the case involving Page Industries Ltd. The judgement restricts the Business from availing ITC in promotional items, which will directly result in an increase in cost for customers.

The Business community is looking for clarifications without which there is a fear of increasing prices in the market, which is the last thing people would want in the present pandemic situation.

About the Page Industries Ltd. Ruling

If you have no idea about the ruling that we are discussing, here is a quick explanation of the situation:

It is a common practice for companies to give promotional items like Carry Bags, Pens, Calendars with the company's branding to dealers.

The Advance Ruling Authority says that since the dealer is not taken into consideration, this delivery of promotional items will be considered as a supply. This delivery also does not attract Schedule I as the dealer is not a related party. The promotional items are also not assets because their record is maintained in the Profit and Loss account.

Therefore, the promotional items are to be considered as Non-Taxable Supply. GST payment has to be made for these items, but ITC, as per Section 17(2), cannot be asked for.

Surprisingly, there have been no discussions about the definition of Non-Taxable Supply, which defines the supply of goods or services or both, which is not leviable to taxes.

Is the Transaction supposed to be considered as a Supply or not?

The first thing to understand is whether this transaction is to be considered a supply or not!

The transaction can be termed as Non-Taxable supply only when it falls under the definition of a supply. As the ruling defines, the transaction is not a supply, then how can we term it as a Non Taxable supply?

Not only this, but when we look into the basic definitions, we get to know that ITC can be applied in cases where particular goods or services are used for Business functions. The Honorable Supreme Court has also mentioned the same in the case involving Coca-Cola during the pre-GST era.

Sales promotions are also part of Business functions. Activities by companies like distributions of promotional items directly result in increased Business and sales. This fuels growth and allows the companies to pay more GST with growing sales.

What to do if you are faced with such a situation?

If you are faced with such a situation, you must make efforts to explain the scenario to the Officer.

You must explain that the distribution of promotional items is not done randomly but is done only to particular dealers who sell the goods or services of your company. The dealer will also give the carry bag only to customers who buy goods from your company and not randomly.

This cannot be considered as a gift because a gift involves no obligations and is given without any intentions in mind. However, in this case, the carry bags are only given to contribute to the company's increased sales.

The Case of Baglekar Akash Kumar involving Carry Bags

We can get more information about this matter by checking the case involving Baglekar Akash Kumar in the District Consumer Dispute Redressal Commission, Hyderabad.

This case mentions that the customer is actually a walking advertising agent for a company and charging him/her for the carry bag is an unfair trade practice by Businesses.

When the customer does not pay for the bags and these will obviously not be sold otherwise, it will result in increased prices. Do it one way or the other; the customer will always have to bear the expense of the bag.

Because of this, we sincerely believe that every company must get ITC for all the spendings on promotional items.

Not giving the ITC will result in increased pricing, which is not a favourable scenario for anyone at the moment.

If you are facing any issue related to GST or have unanswered questions, contact us, and we will help you build a streamlined GST system that not only functions automatically but also supports other parts of your Business!