Input Tax Credit (ITC) on Diwali Gifts
Diwali is India’s most celebrated festival and it is around the corner. Diwali is a time when businesses send gifts to vendors, customers, partners, consultants, and so on. As a result, whether the input tax credit on Diwali gifts is available or not becomes a very important question, as a lot of money is spent on these gifts and a lot of ITC is involved.
Input Tax Credit Availability on Diwali Gifts
A taxpayer is allowed to receive credit for input tax paid on supplies of goods or services to him that are utilized in the furtherance or course of his business, according to section 16.
The term “course of business” refers to everyday business activities such as manufacturing, trading, and so on. It refers to commercial transactions that are directly connected to the operation of the firm, such as the acquisition of raw materials, capital goods, and so forth.
However, it is critical for us to comprehend the furtherance of business, which is defined as the act of advancing or promoting a firm to ensure its long-term growth and profitability.
One thing is certain: Diwali gifts given to business associates would undoubtedly fit within the concept of furtherance of business because these presents are typically provided to maintain excellent business relationships to enhance commercial activities.
Definition of Goods and Services
Every type of moveable property, actionable claims, growing crops, grass, and items linked to or constituting part of the land that are agreed to be severed before delivery or under a supply contract are all considered goods. However, the following goods are not included:
- Money
- Securities
It is required to use a commodity for supply to label it a good. To be classified as a supply, a transaction must either include consideration or be listed in Schedule I of the GST Act. Except for gifts given to employees, there is no mention or consideration of gifts in Schedule I. As a result, these Diwali presents fall outside the category of “Goods” from the perspective of a business unit acquiring them.
It should be noted that the same Diwali present will be considered as a supply of commodities for the seller who sold such items, and the provider will be required to levy tax. As a result, it’s possible to conclude that Diwali presents meet Section 16 of CGST Act requirements for claiming an ITC.
Diwali Gifts Given to Employees
Any sum paid as a wage in exchange for the employee’s services is exempt from GST because it is not considered as a supply.
According to GST rules, all gifts from an employer to an employee that exceed INR 50,000 are subject to GST in India. In simple words, if an employer gives anything worth more than INR 50,000, he/she needs to pay GST on it. However, it shall be noted that no ITC is allowed on the Diwali gifts distributed to employees.
Moreover, Section 17(5) (b) I of the GST Act prohibits the ITC for food and beverages, making it a blocked credit. As a result, any sweets or beverages purchased for employees will not be eligible for an input tax credit.
The Bottom Line
A taxpayer may claim an input tax credit for Diwali gifts purchased and delivered to business associates, however, there will be no ITC for sweets and other eatables purchased for distribution to workers/employees or any Diwali gifts given to employees by the employer.
