The Appellate Authority for Advance Ruling (AAAR) has held that the GST paid on promotional items cannot be availed as Input Tax Credit (ITC).

Hearing a petition filed by Page Industries, makers of Jockey and Speedo brands, the Karnataka AAAR observed that the promotional products/materials and marketing items used by the company can be considered as “inputs” as defined in Section 2(59) of the CGST Act, 2017. However, the GST paid on the same cannot be availed as ITC in view of the provisions of Section 17 (2) and Section 17 (5) (h) of the CGST Act, 2017. The AAAR has disposed off the application.

“The ruling has rightly held that display boards, posters, etc. sent to the franchisees and distributors are inputs and not capital goods. However, as the credit has not been allowed even by the AAAR, the issue on eligibility of tax credit on promotional products, marketing materials as they are ultimately used in business still remains alive,” said Harpreet Singh, Partner at KPMG.

The company sells its products through its own outlets and also through their distributors and retail dealers. The company procures various items such as gandola racks, wall shelves and panels, mannequins, storage units, hangers, signages, posters, display stands, etc. which are used in the showroom for display of their product. It also procures distributable items such as carry bags, calendars, diaries, leather bags, pens with their brand names embossed, which are distributed to the showrooms and retailers for giving away to customers who purchase their products.

Last year, the company approached the Authority for Advance Ruling (AAR) seeking ruling onwhether promotional productscan be availed as ITC. The AAR held that distributable goods supplied to distributor and franchisee can be considered as deemed supply (being related parties) and hence, the ITC on these items will be allowed. However, where these items are supplied to retailers, the ITC will not be allowed as these are free supplies.

AAAR’s ruling

The AAR also said that non-distributable goods (such as gandola racks, wall shelves, display stands) are capital goods and not inputs. “The applicant is eligible to claim the ITC on their procurement, but in case if they are disposed by writing off or destruction or lost, then the same needs to be reversed,” it ruled.

As the company was not satisfied, so, it approached the AAAR. Here, it argued that the items such as display boards, posters, etc. sent to the franchisees and distributors have not been capitalised in their books of accounts but have been treated as revenue expenditure. The items which are distributed to their franchisees and distributors for giving to the customers, cannot be considered as gifts but to be treated as a form of promotional /advertising activity which is eligible for the ITC.

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