Tax burden on corporate sponsorships eased

New Delhi: The Goods and Services Tax (GST) Council’s decision on Saturday to tweak a rule on corporate sponsorships is set to make these deals more tax efficient and the recipient of funds better off, officials and experts said.

The Council’s decision to shift the onus of remitting tax on sponsorship deals from the donor—that is, the entity that receives the benefits of a sponsorship deal in terms of brand promotion and access to target audience etc., to the entity that offers it for a price,  for example, a sports event organizer—is set to enable the latter to lower its overall tax liability, they said.

The current regime of making the recipient entity liable to charge the tax on the transaction and pay the government is an exception to the general indirect tax rule of suppliers of goods or service collecting the same and remitting to the government. This exception is called reverse charge. 

What experts say

The government has received representations from sports event organizers to remove corporate sponsorships from being an exception to the general rule as it has adversely affected their tax liability in terms of availability of tax credit for other goods or services procured for the sponsored event, said a government official, who spoke on condition of not being named. 

“Under existing rules, corporate sponsorship deals for which the sponsor is liable to make tax payments under the reverse charge mechanism, is considered as tax exempt in the hands of the sponsored company such as an event organiser. So, the latter cannot set off credit from any taxes paid on other goods or services procured in relation to the sponsored event, against the tax on the sponsorship deal, because it is paid by another entity–the sponsor. The new rule of shifting the liability to remit tax to the government to the entity organising events and offering brand promotion and other services, enable them to use tax credits available with them. This makes it more tax efficient for those entities,” explained Abhishek Jain, indirect tax head and partner, KPMG.

The Council’s decision to bring corporate sponsorship under ‘forward charge’, the default way of collecting indirect tax, simplifies tax compliance and improves transparency for both service providers and recipients, said Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.

“It eliminates complexities of the reverse charge mechanism, ensuring seamless input tax credit for recipients and giving providers greater control over tax reporting,” said Sehgal. 

However, the change also brings challenges, Sehgal said. Providers such as event organisers face increased compliance responsibilities, including timely filings and accurate invoicing, while recipients–the sponsors, must now verify that GST has been correctly paid by the supplier and ensure it reflects in form GSTR-2B to claim input tax credit by the sponsor, explained Sehgal. Businesses partly set off their final tax liability using credits for the taxes paid on raw materials and services used, in the value added tax system. 

The decisions of the GST Council’s Saturday meeting demonstrated a clear shift towards a more pragmatic and consultative approach to tax policy, said Saurabh Agarwal, Tax Partner, EY.