Corporate Gifting in India: Understanding the Legal Landscape

 


The practice of corporate gifting has always been a way of cultivating goodwill and reinforcing relationships while celebrating milestones in the business domain. 

Acceptable as a practice throughout varied sectors, corporate gifting in India comes with a legal framework of compliance. 

From taxation to the anti-bribery provisions, the legal nuances surrounding corporate gifting require businesses to appreciate and, at the same time, be accountable.

Tax Rules Relating to Gifting Employees

Corporate gifting in India has several dimensions, as supported by corporate gifting under the Income Tax Act, 1961. Unlike the general belief, all gifts offered by employers to employees are not exempted. As per the current provisions, gifts not exceeding ₹5,000 in a financial year are exempt. 

However, if the value of gifts received by the employee exceeds the ₹5,000 threshold, the whole value is taxable to the employee as a perquisite and would be added to her salary income. 

These gifts could be in the form of vouchers, hampers, cards, or other assorted items. For businesses, this also means that all corporate gifts to employees have to be accounted for in order to adhere to the necessary legal frameworks during the payroll and tax processes at the end of the financial year.

Providing Gifts to Clients and Business Associates

For client and third-party associate gifting, the parameters change slightly. Spending money on corporate gifts given to clients can be classified as a business expense as long as spending money on clients is reasonable and the expense is directly related to the promotion of the business. 

However, reasonable claims can only be made if the proper paperwork and invoices are provided. 

The Income Tax Department may refuse the deduction if the spending is considered unreasonable or lacks business rationale. It is, however, essential that companies maintain proper documentation. The gifts provided by the company must maintain proper proportionality as well as transparency. 

For gifts, as well as the reason for giving them, documentation must be prepared. This is to avoid legal issues from assessments that may arise in the future.

Corporate governance and anti-bribery issues.

Apart from taxation, corporate gifts should also be viewed from the perspective of corporate governance and ethical business practices. The Prevention of Corruption Act, 1988, and subsequent amendments, prohibits the offering of gifts or favors that might be construed as a bribe to public officials. 

Companies must be careful in offering gifts to government officials and entities, as even gifts that are considered to be of minimal value can attract legal attention if they are perceived to be influencing the actions of decision makers. 

Also, under corporate governance, the abuse of gifts should also be governed in order to avoid the risk of the business relationship losing its value or a situation being created of a “conflict of interest.” 

In India, a number of organizations have come up with internal policies that specifically limit the permissible value of gifts, mandate disclosures, or altogether ban certain types of corporate gifts.

Impact of GST on corporate gifts.

Like everything else in the corporate world, has some GST implications on corporate gifts. A business that purchases goods and/or services to be gifted, and when the gifting is done without consideration, input tax credit for the tax paid on purchases may not be available. 

Meaning the company is liable to pay GST on the purchase of the gifts; however, in case the gifts are distributed free of charge, the company will not be able to claim any credit for tax paid. 

Since GST and input tax credit are closely interlinked, the decision of any business on gifting strategies has to be done with utmost consideration to taxation.

Conclusion

While valuable for building and nurturing business relationships, corporate gifting in India comes with a set of legal and compliance risks that any business must negotiate with caution. 

Businesses should take to the letter all taxation rules about gifts to employees or clients, as well as the MSSA anti-bribery policy and the GST rules in the India tax system. 

The balanced approach for all businesses, irrespective of size, is to combine carefully planned gifting with full compliance to the legal and self-regulatory system that a company has put in place to govern its business conduct. 

When done that way, corporate gifting shifts the focus to building long-lasting relationships, which also helps the business show its appreciation for ethical, open, and responsible business ways.

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