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Over the last few years, companies have realized the vast potential of corporate promotional items, and the impact that such gift items can have on their businesses. They are being used increasingly to forge long-term relationships and increase the brands’ consumer base. However, judicious use of corporate gifting is significant, because it can adversely impact your business if not carried out correctly. Tax implications are the most critical factor to consider, both by the giver as well as the recipient. Here is an overview of the tax treatment in the hands of the giver as well as the recipients of the corporate gift items.
When an organization gives presents to its clients or partners, the company projects such expenditure as an expense of business promotion, which can be deducted from its income. In the case of the employees, the company shows the spending on gifts as employee welfare expense. However, any such expenditure should be sufficiently reasonable so that it can be justified against the size and revenue of the organization.
CBDT has issued a circular which states that any expense incurred by the pharmaceutical companies in providing gifts to medical practitioners, violating the guidelines of the Indian Medical Council Regulations, 2002, shall be inadmissible under the section 37(1) of the IT Act, and will be viewed as an expense proscribed by law. The sum equivalent to the value of the freebie received by the medical practitioner shall, therefore, be taxable as business income or an income from other sources, according to the facts of the case.
Customer: When a customer receives a reward from a company for buying a product of a specific brand, under the provisions of section 56(2)(vii) of the IT Act, 1961, it shall be taxable as income from other sources, if the value of the property received is higher (in excess of the prescribed limit of Rs. 50,000) than the value of the products that the customer has purchased. Therefore, the difference between the amount of the purchased product, and the property received will be liable to taxation.
Business associate or partner: Companies often gift their partners and associates for having achieved a specific target. The reward received by the organization may be taxed as business income, in the hands of partners and associates.
Employee: India witnesses customary gifts exchange during festivals. Gifts up to the value of Rs 5,000 are exempted from taxation. Any gift over the amount of Rs 5,000 shall be treated and taxed as a perquisite in the hands of the employees.
It is highly advisable to maintain a directory and documentary evidence, to avoid any dispute with the tax authorities later. Exchange and enjoy the gifts, but don’t throw caution to the wind.