Companies tweak strategies as every product sold needs to have notional value in new tax regime
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 compa nies will have to pay additional tax on anything they give away as `free' to consumers and stand to lose input cre dit 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 buy-oneget-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 the goods and services tax.“
In a slowing consumer goods market where both packaged product makers and eating out have been witnessing 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 managing director 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-getone free schemes.
Subway Restaurants too is not running any buyone-get-one-free offers currently.
“Under the GST fine print, every product sold in food services has to have a notional value. So we are doing away with our buy-one-getone-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 so mething 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 of cost, 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 clarity is required on the issue.
“Freebies offered to consumers like buy-one-get-one-free 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-oneget-one-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.
The Economic Times, New Delhi, 01st August 2017
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