Incentives in the form of gold, other assets may attract GST
Companies offering incentives to their dealers in the form of assets, such as gold coins, may face tax uncertainties under goods and services tax (GST) following a recent ruling by the Karnataka Authority for Advance Ruling (AAR).
In a case involving Orient Cement, the AAR determined that such incentives provided by companies to dealers should be classified as a “supply" under GST rules and be subject to tax.
Tax experts said the judgment contradicts previous court verdicts on similar cases. That apart, since such incentive schemes are very common across companies, a clarification from GST Council would allay industry concerns, they added.
The case concerns two special dealer schemes offered by Orient Cement, in which dealers get rewards in gold coins based on their cement purchases during a specific period. The central question in this case was whether distribution of gold coins should be considered ‘permanent transfer’ of assets. According to GST rules, any permanent transfer or disposal of business assets, where input tax credit is claimed, will be considered as supply of goods.
Orient Cement argued its scheme should not be categorized as a supply of goods because the gold coin is not an asset of the firm, but is treated as expenses, according to accounting standards and were not capitalized in the company’s books.
Furthermore, it asserted that the company did not receive any consideration for these gold coins, but they were offered as a reward when a dealer achieved a specific target.
“The ruling clarifies that distribution of promotional materials should be considered a supply, even if done without any consideration, falling under the Schedule 1 (permanent transfer or disposal of business assets) when input tax credit is claimed on those assets,"said Saurabh Agarwal, tax partner, EY.
“This ruling contradicts with previous judgments and industry awaits further clarification from the GST Council on this matter," he added.
However, the revenue department contended that the gold coins were indeed permanently transferred to the dealers, and input tax was also being claimed. They further told the authority that the GST Act does not stipulate that transfer of assets must be reflected in a company’s balance sheet to be considered a supply.
“The applicant’s obligation to issue gold coins and white goods to dealers or customers upon achieving the stipulated lifting of the material or purchase target during the scheme period would be regarded as a “permanent transfer or disposal of business assets where ITC has been availed on such assets", and will be treated as a supply even if made without consideration and subjected to GST under SI. No. 1 of the Schedule I to the Central Goods and Services Tax Act, 201 7," the AAR said in its ruling on 24 August.
The case also delved into the question of whether these gold coin transfers should be classified as gifts, where input tax credit will not be available. According to the rules, gifts do not qualify for input tax credit.
Orient Cement has contended that these were promotional items provided to dealers only when specific conditions, such as the quantity of cement purchased, was met. The AAR concurred with the company’s position and permitted input tax credits.
