Companies providing incentives to their dealers in the form of assets, such as gold coins, are facing tax uncertainties under India’s 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 ruled that incentives provided by companies to dealers should be classified as a “supply” under GST rules and subjected to tax. This decision has raised concerns among tax experts, as it contradicts previous court rulings on similar cases.
The case centered around two special dealer schemes offered by Orient Cement, where dealers received rewards in gold coins based on their cement purchases during a specific period. The key question was whether the distribution of gold coins should be considered a “permanent transfer” of assets, as per GST rules. According to GST regulations, any permanent transfer or disposal of business assets, where input tax credit is claimed, is treated as a supply of goods.
Orient Cement argued that its scheme should not be categorized as a supply of goods because the gold coin is not an asset of the company but is treated as an expense according to accounting standards, and it was not capitalized in the company’s books. Additionally, the company asserted that it did not receive any consideration for these gold coins; they were offered as a reward when a dealer achieved a specific target.
Tax experts have expressed concerns about this ruling, as it contradicts previous judgments and creates uncertainty for companies offering similar incentive schemes. They are calling for further clarification from the GST Council to address industry concerns.
The revenue department, however, contended that the gold coins were permanently transferred to the dealers, and input tax was being claimed. They argued that the GST Act does not require the transfer of assets to be reflected in a company’s balance sheet to be considered a supply.
The AAR ruled that the distribution of promotional materials should be considered a supply, even if done without any consideration, as long as input tax credit is claimed on those assets. This decision has implications for companies offering such incentives and has raised questions about whether these transfers should be classified as gifts, which do not qualify for input tax credit. Orient Cement argued that these were promotional items provided to dealers only when specific conditions, such as the quantity of cement purchased, were met, and the AAR agreed, permitting input tax credits.
In light of these developments, clarity from the GST Council is being sought to resolve the uncertainty surrounding such dealer incentive programs.
