Every festive season, businesses purchase gift hampers, sweets, electronic appliances, and gold coins for staff. When finance teams review vendor tax invoices reflected in GSTR-2B, the primary reconciliation question is whether the GST paid on these festive purchases can be claimed as input tax credit.
Why Section 17(5)(h) blocks ITC on gifts
The entitlement to input tax credit under Section 16(1) is subject to the conditions and restrictions laid down in the statute. Specifically, statutory restrictions are governed by Section 17(5)(h) of the CGST Act, which explicitly provides that input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. For a detailed breakdown of all statutory exclusions, refer to our guide on blocked credit under GST Section 17(5).
In addition, clarification issued in CBIC Circular No. 92/11/2019-GST affirms that when items are supplied free of cost without consideration, ITC is not available to the supplier on inputs, input services, and capital goods to the extent used for such free distributions. Because Diwali presents are handed over without consideration, they fall squarely within the definition of goods disposed of by way of gift.
Common mistake: Treating Diwali presents as general staff welfare or business promotion expenses to claim ITC. Even if an expenditure is booked as a legitimate business expense in financial accounts, Section 17(5)(h) overrides general eligibility and strictly disallows input tax credit.
The Rs 50,000 threshold under Schedule I
Confusion often arises between inward credit eligibility and outward tax liability under the law. Paragraph 2 of Schedule I of the CGST Act deals with supplies between related persons or distinct persons made in the course or furtherance of business without consideration. By statutory definition, an employer and employee are treated as related persons.
The proviso to Schedule I Paragraph 2 states that gifts not exceeding ₹50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. This statutory threshold governs whether outward GST is payable by the company:
- Gifts up to ₹50,000 per employee in a financial year: Not treated as a supply under Schedule I. No outward GST invoice is required, and no output tax is payable. However, ITC on the inward purchase remains blocked under Section 17(5)(h).
- Gifts exceeding ₹50,000 per employee in a financial year: The entire value qualifies as a supply under Schedule I. The employer must pay outward GST on the supply.
Dual test check: Schedule I determines outward tax liability on distribution. Section 17(5)(h) determines inward credit eligibility. A gift exempted from outward tax does not make the inward purchase eligible for ITC.
Worked calculation: accounting for festive purchases
Consider a registered manufacturing firm in Maharashtra purchasing Diwali gifts for two staff members during the financial year. The vendor issues a tax invoice charging 18% GST.
| Particulars | Employee A (Hamper) | Employee B (Electronics) |
|---|---|---|
| Purchase value (taxable) | ₹12,000 | ₹60,000 |
| GST charged by vendor @ 18% | ₹2,160 | ₹10,800 |
| Total vendor invoice amount | ₹14,160 | ₹70,800 |
| Schedule I outward supply status | Below ₹50,000 (No supply) | Exceeds ₹50,000 (Taxable supply) |
| Inward ITC status under s.17(5)(h) | Blocked (No credit) | Blocked on gift disposal |
| Outward GST liability for employer | Nil | ₹10,800 payable |
The mathematical computation is straightforward:
- For Employee A: Purchase value = ₹12,000. GST = ₹12,000 × 18% = ₹2,160. Because the annual value does not exceed ₹50,000, outward GST is ₹0. Inward ITC of ₹2,160 cannot be claimed in Table 4(A) of Form GSTR-3B and must be reported under Table 4(B)(1) as ineligible credit under Section 17(5).
- For Employee B: Purchase value = ₹60,000. GST = ₹60,000 × 18% = ₹10,800. Because the value exceeds the statutory threshold of ₹50,000, it constitutes a supply under Schedule I.
Reporting blocked credit in Form GSTR-3B
When supplier invoices for festive gifts appear in auto-generated GSTR-2B statements, accountants must ensure they are not automatically availed in GSTR-3B:
- Identify all festive gift and sweet invoices during your periodic purchase register reconciliation.
- Mark these entries as ineligible under Section 17(5) in your accounting software.
- In Form GSTR-3B, reflect the credit under Table 4(B)(1) as blocked credit so it is permanently reversed and not credited to your electronic credit ledger.
Frequently asked questions
Can a business claim ITC on Diwali sweets or gift hampers given to employees?
No. Under Section 17(5)(h) of the CGST Act, input tax credit is blocked on goods disposed of by way of gift or free samples without consideration.
Does the Rs 50,000 limit in Schedule I allow claiming ITC on employee gifts?
No. The Rs 50,000 threshold in Schedule I determines whether giving a gift triggers an outward GST liability. It does not lift the ITC blockage under Section 17(5)(h).
What happens if a gift to an employee exceeds Rs 50,000 in value?
Under Schedule I Paragraph 2, gifts exceeding Rs 50,000 in value in a financial year to an employee are treated as supplies even without consideration, creating an outward tax liability.
Check your own GSTR-2B
Separate eligible purchases from blocked items when reconciling vendor invoices against your purchase register. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 25 October 2026. Sources: CBIC Tax Information Portal (Section 17), CBIC Circular No. 92/11/2019-GST.