New Delhi: The Goods and Services Tax (GST) Council’s decision on Saturday to amend a rule on corporate sponsorship is expected to make such arrangements more tax efficient and improve the situation of beneficiaries of the funds, officials and experts said.

The Council’s decision to transfer the responsibility for paying the tax on sponsorship agreements from the donor, i.e. the entity that benefits from the benefits of a sponsorship agreement in terms of brand promotion and ‘access to the target audience, etc., to the entity that offers it for a price, e.g. sporting event organizer – should allow the latter to reduce its overall tax liability, they said.

The current regime, which requires the recipient entity to collect tax on the transaction and pay it to the government, constitutes an exception to the general rule of indirect taxation whereby suppliers of goods or services collect those goods and remit them to the government. This exception is called reverse charge.

What the experts say

The government has received representations from sporting event organizers that corporate sponsorships should no longer be an exception to the general rule, as this has had a negative impact on their tax liability in terms of availability of credit. ‘tax for other goods or services purchased for the sponsored event, a government said. official, who spoke on condition of not being named.

“Under existing rules, corporate sponsorship contracts for which the sponsor is required to pay taxes under the reverse charge mechanism are considered tax-exempt in the hands of the sponsored company, such as an event organizer. Thus, the latter cannot deduct the credit for taxes paid on other goods or services acquired in connection with the sponsored event, with the tax on the sponsorship agreement, because it is paid by another entity – the sponsor . The new rule of transferring the obligation to pay tax to the government to the entity organizing events and offering brand promotion and other services, allows them to use tax credits available from them. This makes taxation more efficient for these entities,” said Abhishek Jain, head of indirect taxes and partner at KPMG.

The Council’s decision to subject corporate sponsorship to “forward fees”, the default way of collecting indirect taxes, simplifies tax compliance and improves transparency for service providers and beneficiaries, said Sandeep Sehgal, tax associate at AKM Global, a tax and consulting firm. .

“This eliminates the complexities of the reverse charge mechanism, ensuring a transparent input tax credit for beneficiaries and giving suppliers greater control over tax reporting,” Sehgal said.

However, this change also brings challenges, Sehgal said. Service providers such as event organizers are faced with increased compliance responsibilitiesincluding timely returns and accurate invoicing, while the beneficiaries – sponsors, must now verify that GST has been properly paid by the supplier and ensure that it appears in Form GSTR-2B to claim the input tax credit by the sponsor, Sehgal explained. Companies partly offset their final tax liability through credits for taxes paid on raw materials and services used, under the value added tax system.

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