GST is here! Please don't ask for gifts

As freebies/gift vouchers attract GST, retailers are opting for straight discounts this festive season, report Raghavendra Kamath and Arnab Dutta.

Call it the goods and services tax effect.

The coming festive season could be different from previous ones when it comes to sales-spurring promotional offers from consumer-product companies and retailers.

Gift vouchers or freebies, most visible during festive season offers, are on their way out, with retailers preferring straight discounts to avoid compliance-related complications in the new indirect tax regime.

"We have started giving straight discounts instead of giving gifts," said an executive at Bestseller, which owns brands such as Vero Moda, AND and ONLY.

In the new indirect tax regime, any freebie or gift also attracts GST.

A manufacturer or retailer can avail of input tax credit only on a product sold or given away for free, if it carries an economic value.

With a 'zero' price tag, the manufacturer or retailer would not only have to bear the incidence of tax, but would also not be able to avail of input tax credit.

"If we do not get input credit, we will not do it (give freebies). Economics of any offer has to work," says Nikhil Chaturvedi, managing director at the fashion chain Provogue.

Normally, fashion retailers give gift vouchers or freebies during the festive season.

"Retailers will stop these schemes (such as buy one-get one free, or free gifts) as they do not want to pay tax that they cannot pass on," noted Anupam T, vice-president at Oberoi Mall in Mumbai's Goregaon area.

Brands owned by Madura and Raymond have started giving flat discounts on purchases of certain items.

Consumer durables players are looking at tweaking invoices to give promotional offers during the festive season.

According to C M Singh, chief operating officer, Videocon, manufacturers and retailers would have to bill both -- the product and the gift accompanying it.

"The trend is towards high value gifts like home theatre systems, which draw a significant tax amount. It is not viable for companies to bear the entire tax just to provide free gifts," he added.

A senior executive from another durables major said the pricing of products would have to be readjusted to incorporate the tax associated with the gift.

The festive season kicks off from the middle of August with Raksha Bandhan, Janmashtami and Independence Day spread over weekends.

It continues till the year end, with sales peaking during Diwali.

This period accounts for 40 per cent of annual sales of consumer durables players.

Retailers are constantly looking at ways to bypass compliance requirements that come with freebies or gifts.

For instance, an outlet of Modern Bazaar in south Delhi is still running one-plus-one offers for several food and personal hygiene products.

However, when it comes to invoicing, the items concerned are offered at a 50 per cent discount.

"We are billing these products at half of their MRP," the store manager said.

Another large format retail chain in Delhi is now focusing on discounted packs.

"We are putting the discounts upfront, instead of offering free items," said the store manager.

After liquidating stocks in June as part of pre-GST sale, most dealers and distributors were in wait-and-watch mode during July.

Manufacturers expect orders to start growing from August onwards, with retailers left with very low inventory.

'Discounting' gift coupons

• In the new indirect tax regime, any freebie or gift also attracts GST.
• A manufacturer or retailer can avail of input tax credit only on a product sold or given away for free, if it carries an economic value.
• With a 'zero' price tag, the manufacturer or retailer would not only have to bear the incidence of tax, but would also not be able to avail of input tax credit.

Photograph: Mark Blinch/Reuters