GST Eats into ‘Buy One Get One Free’ Of­fers

Com­pa­nies tweak strate­gies as every prod­uct sold needs to have no­tional value in new tax regime

The Economic Times - - Front Page - Ratna.Bhushan@ times­group.com

New Delhi: There’s no such thing as free pizza — or ‘free’ any­thing — un­der GST, it would ap­pear. That sta­ple of pro­mo­tional schemes among con­sumer­fac­ing pack­aged prod­ucts and foods ser­vices com­pa­nies — buy one get one free — is be­ing axed by many of them a month af­ter the goods and ser­vices tax was rolled out.

The move is ne­ces­si­tated by the GST fine print, ac­cord­ing to which com­pa­nies will have to pay ad­di­tional tax on any­thing they give away as ‘free’ to con­sumers and stand to lose in­put credit when they clas­sify a prod­uct sale as ‘free’. That’s forc­ing com­pa­nies to look for other ways to win over cus­tomers.

“We are do­ing away with buy­one-get-one-free of­fers and are switch­ing to up­front dis­count­ing,” said Mayank Shah, mar­ket­ing head at bis­cuit maker Parle Prod­ucts. “This is caus­ing dis­rup­tion but it’s what is re­quired un­der GST.”

In a slow­ing con­sumer goods mar­ket where both pack­aged prod­uct mak­ers and eat­ing out have been see­ing muted sales for the past eight quar­ters at least, com­pa­nies have tra­di­tion­ally banked heav­ily on free­bies to spur con­sump­tion.

“Given some of the tax im­pli­ca­tions un­der GST, our team is eval­u­at­ing the op­ti­mal path for­ward and we will likely be­come more se­lec­tive when giv­ing prod­ucts as pro­mo­tional items,” said Go­drej Con­sumer Prod­ucts MD Vivek Gamb­hir. The com­pany will de­ploy dif­fer­ent strate­gies, such as dis­counts, price-offs and prod­uct give­aways, he said.

The top two food ser­vices com­pa­nies in the coun­try—Ju­bi­lant FoodWorks (Domino’s Pizza) and Yum Restau­rants-owned Pizza Hut — are stop­ping buy-one-get-one free schemes. Sub­way Restau­rants too is not run­ning any buy­one-get-one-free of­fers now.

“Un­der GST, every prod­uct sold in food ser­vices has to have a no­tional value. So we are do­ing away with our buy-oneget-one-free of­fers,” Pizza Hut manag­ing di­rec­tor Un­nat Varma said. “We are cur­rently run­ning of­fers, for ex­am­ple, un­der which con­sumers can buy two piz­zas and get dis­counts on the third.”

TAX ON FREE­BIES

Every time a com­pany sup­plies some­thing free, it will have to bear the GST bur­den on it. This may also in­clude free­bies given by phar­ma­ceu­ti­cal com­pa­nies to doc­tors, said tax ex­perts.

“As per the GST Act, every time some­thing is sold free, its ‘trans­ac­tional value’ must be found out and GST paid on it,” said ClearTax chief ex­ec­u­tive Ar­chit Gupta. “Which means to pre­vent con­fu­sion around levy­ing and de­posit­ing GST on free prod­ucts and un­cer­tainty around whether such GST can be availed as in­put credit, com­pa­nies may pre­fer to pro­vide pre-de­fined dis­counts and price re­duc­tions.”

Tax ex­perts said fur­ther cla- rity is re­quired on the is­sue.

“Free­bies of­fered to con­sumers like buy-one-get-one­free schemes are com­mon mar­ket­ing prac­tice and the prod­uct of­fered free of cost should not qual­ify as a ‘gift’ re­quir­ing re­ver­sal of in­put credit,” said Pratik Jain, part­ner and na­tional leader, in­di­rect taxes, PwC. “How­ever, it would be good if the gov­ern­ment specif­i­cally is­sues a clar­i­fi­ca­tion in this re­spect.”

Pack­aged goods firms such as Dabur and Marico also said pro­mo­tional pogrammes are in the process of be­ing tweaked to in­clude more combo packs and price-offs.

How­ever, GST is not the prime rea­son for all com­pa­nies look­ing to move away from the strat­egy. Ju­bi­lant FoodWorks said in an in­vestor call last month that it was dis­con­tin­u­ing its pop­u­lar buy-one-getone-free pro­mo­tion for Domino’s Pizza. But it ex­plained that this was be­cause the in­cre­men­tal im­pact of such pro­mo­tions was fad­ing and the of­fers were di­lut­ing brand eq­uity be­sides hurt­ing mar­gins and prof­itabil­ity.

Every time a com­pany sup­plies some­thing free, it will have to bear the GST bur­den on it

ANIRBAN

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