Once the much-touted Goods and Services Tax sets in, the middle class and consumer goods companies may be in for a rude shock if the model draft of the law is accepted in full.
According to a report in The Economic Times, one of the popular sales promotion strategies of consumer goods companies - buy one get one free sales - is likely to come under tax net, taking the sheen away from such promotions not only for companies but even for consumers.
The report cites Section 3 of the draft which says that the items specified under Schedule I is also liable for GST.
Under Schedule-I, the law lists matters to be treated as supply without consideration. They are listed as follows:
1. Permanent transfer/disposal of business assets.
2. Temporary application of business assets to a private or non-business use.
3. Services put to a private or non-business use.
4. Assets retained after deregistration.
5. Supply of goods and / or services by a taxable person to another taxable or nontaxable person in the course or furtherance of business.
It is the fifth item in the list that is giving rise to the confusion.
Experts see this as a way to tax the free item that the consumer gets in such sales.
"Any form of direct or indirect GST on free supplies could have a significant impact on the sales & marketing spend of companies, specifically those dealing in consumer products," Pratik Jain, national indirect tax leader of PwC in India, has been quoted as saying in the report.
Experts have told the newspaper that the government needs to clarify.
Given such sales are popular among the consumer goods companies and middle-class consumers, any plan to tax free items supplied thus is likely to backfire.
The GST draft law is in the public domain for comments. The government hopes to pass the Bill in the monsoon session of Parliament starting next month. The target is to roll out the biggest reform from April 2017.