Samples – Interplay between GST & newly introduced Section 194R in Income Tax Even if the amount recovered towards the TDS is not to be treated as consideration towards supply of the sample, the question arises as to whether the said amount can be treated as consideration towards any other supply… Sampling is an age-old product marketing strategy with the intent to promote...
Samples – Interplay between GST & newly introduced Section 194R in Income Tax
Even if the amount recovered towards the TDS is not to be treated as consideration towards supply of the sample, the question arises as to whether the said amount can be treated as consideration towards any other supply…
Sampling is an age-old product marketing strategy with the intent to promote the company's products and achieve enhanced sales. Companies predominantly led by pharma and FMCG are spending approximately $600-700 million annually on sampling and trial.
Introduction of Section 194R in Income Tax
The Finance Act, 2022 has inserted a new Section 194R in the Income Tax Act, 1961 with effect from 1 July, 2022. The new Section 194R casts an obligation on the person responsible for providing any benefit or perquisite to any person to deduct tax at source @ 10%, whether the benefit or perquisite is in cash or in kind.
The scope of the Section seems to be very expansive. Further, Circular No. 12 of 2022 dated 16 June, 2022 issued by the CBDT has clarified that samples are included in the scope of the aforesaid Section. Thus, CBDT has sought to treat samples as a benefit on perquisite in the hands of the recipient on which TDS is liable to be deducted subject to other conditions being fulfilled.
Several corporates scurrying to comply with the newly introduced 194R are now deducting TDS on the samples being provided to their customers. This is resulting in an added cost for the corporates as the TDS has to be paid in cash on benefits being provided in kind which is currently being borne by the corporates themselves.
Now, to ensure that the deduction of TDS under Section 194R doesn't become an added cost, corporates are relooking at their contractual arrangements and product marketing strategies. There are cases where corporates have commercially negotiated with their customers for recovery of an amount equivalent to TDS amount deducted on the samples provided to the customer. Further, this is also acceptable to the customer as the customer will anyways be eligible for the credit of the TDS so deducted by the corporate.
However, once the amount of TDS (which was deducted towards giving free samples) is recovered from the customer, corresponding implications are to be seen under the GST Act also, which provides that any supplies of goods or services for a consideration shall be subject to GST.
The question therefore which then arises is – Whether the samples given to the customer are indeed free or whether the amount equivalent to the TDS recovered from the customer will qualify as consideration towards supply of goods and be leviable to GST?
It is to be noted that the amounts collected from the customers in such cases are purely stemming out of commercial negotiations between both the parties to make the scheme of deduction of TDS under Section 194R workable for the corporates.
However, here, it is apprehended that the Department may bring in a vexatious argument that the amount collected is not in the nature of tax as it is being collected due to contractual arrangements and not by force of any statutory requirements and thus will qualify as consideration towards supply of goods and be leviable to GST.
The aforesaid difficulty is not limited to the case of samples alone but every case of benefits/perquisites in kind provided by a corporate which attracts TDS under Section 194R and the TDS amount is collected by the deductor as a result of commercial negotiation.
Further, the added complexity in the case of samples is the requirement of reversal of input tax credit under Section 17(5)(h) of the CGST Act on goods given away as free samples. In such a case, the treatment given on the outward side will have a direct bearing on the reversal of credit on the inward side.
If a stand is taken that samples are provided for consideration and should be taxable, then the samples are no longer free and credit need not be reversed. However, if the substance of the transaction is looked at over form and a view is taken that the amount reimbursed by the customer is merely on account of tax which does not qualify as consideration towards a taxable supply, the provision of free samples will attract reversal of credit under GST.
Apart from the above, even if the amount recovered towards the TDS is not to be treated as consideration towards supply of the sample, the question arises as to whether the said amount can be treated as consideration towards any other supply (say a supply of "service" whose definition under Section 2(102) of the CGST Act covers anything other than goods, money or securities) and correspondingly what would be the HSN and rate of applicable GST. In such a situation, whether both reversal of ITC on free sample and payment of GST on outward supply will be attracted?
Thus, the situation is a double-edged sword, and the corporates must tread cautiously. The contractual obligations and arrangements between the parties must be reviewed thoroughly. A suitable clarification from the Government will also be a welcome step in the right direction.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.