Summary: The 57th GST Council Meeting held on 8 October 2026 proposed removing the existing restriction on input tax credit relating to free samples under Section 17(5) of the CGST Act, 2017. Presently, Section 17(5)(h) generally blocks ITC attributable to goods distributed without consideration as free samples, even when the distribution serves genuine business-promotion purposes. The proposed relaxation may benefit pharmaceutical manufacturers, FMCG businesses, cosmetic companies, food manufacturers, chemical industries and other businesses distributing product samples for testing, demonstration and promotion. CBIC Circular No. 92/11/2019-GST clarifies that ordinary free samples generally do not constitute taxable outward supplies unless Schedule I applies, while the corresponding ITC is restricted under the existing law. The proposed change may permit businesses to retain qualifying ITC on such samples, subject to Section 16 conditions and the final statutory wording. However, independent free samples must be distinguished from gifts, genuine buy-one-get-one schemes, deemed supplies under Schedule I and goods consumed during product testing. The proposal also raises questions concerning outward GST liability where credit is availed on goods subsequently distributed without consideration. Illustrative calculations demonstrate the potential benefit of retaining previously blocked credit, but eligibility will depend on proper invoices, business purpose, stock records, credit attribution and other statutory requirements. The Council has not expressly recommended retrospective relief for earlier financial years. As of 20 October 2026, the proposed amendment had not become operative, and the final legislation will determine its scope, commencement and transitional treatment.
- Introduction
- 1. Existing Legal Position under Section 17(5)(h)
- Existing Law versus Proposed Amendment
- 2. CBIC Circular No. 92/11/2019-GST – Existing Departmental Clarification
- First – Outward GST Liability
- Second – Input Tax Credit
- 3. How Can ITC Be Allowed When Free Samples Are Not Treated as Sales?
- Example – Pharmaceutical Samples
- 4. Comprehensive Case-Wise Analysis of Free Samples
- Table A – Free Samples Distributed in Different Business Situations
- 5. Practical Example – Calculation of ITC on Free Samples
- Comparison under Existing and Proposed Law
- 6. Pharmaceutical Industry – Major Beneficiary
- Practical Illustration
- 7. FMCG and Consumer-Products Sector
- Practical Illustration
- Difference Between Product Samples and Advertising Services
- 8. Buy One Get One Free – ITC Already Allowed under Existing Law
- Example
- Comparative Position
- 9. Free Samples versus Gifts
- 10. Does a Free Sample Become an Exempt Supply?
- 11. Important Legal Issue – Schedule I and Deemed Supply
- 12. Will Outward GST Be Payable on Free Samples after the Amendment?
- 13. Conditions for Claiming ITC after the Proposed Amendment
- 14. Whether ITC of Earlier Financial Years Can Be Reclaimed
- Conclusion
Introduction
The 57th GST Council Meeting held on 8 October 2026 has proposed an important relaxation in the blocked-credit provisions under Section 17(5) of the CGST Act by recommending removal of the existing ITC restriction relating to free samples, which are presently covered by Section 17(5)(h). The proposal is particularly relevant for pharmaceutical, FMCG, cosmetic, food, chemical, textile and other businesses that regularly distribute genuine product samples for promotion, testing or demonstration. However, the proposed relaxation should not be treated as an automatic entitlement in every free-distribution case, because the final statutory wording, Section 16 conditions, Schedule I deemed-supply rules, distinction between free samples and gifts, treatment of BOGO schemes, exempt-supply implications and outward GST liability may still affect the final tax position.
In this article, I have discussed the practical applicability, calculation methodology, reporting and documentation requirements, and key precautions relating to Input Tax Credit on free samples under the CGST Act. In case you have any doubt after reading this article, or if you feel that any practical aspect requires further discussion, you may contact me at the contact details mentioned at the end of this article.
This proposed relaxation is particularly important for pharmaceutical companies, FMCG manufacturers, cosmetic companies, food-product manufacturers, chemical industries, textile businesses and other companies regularly distributing free samples to promote their products.
Under the existing GST law, free samples distributed without consideration are generally not treated as taxable outward supplies. However, ITC attributable to these samples is specifically blocked under Section 17(5)(h), even where they are distributed for genuine business promotion.
The proposed amendment seeks to remove this restriction, potentially allowing businesses to retain ITC on goods distributed as promotional samples.
Important: The GST Council has recommended removal of the ITC restriction relating to free samples under Section 17(5). Since free samples are presently covered by Section 17(5)(h), the proposed reform is expected to affect that provision. However, the exact statutory wording and effective date will be known only when the amendment is enacted and brought into force.
1. Existing Legal Position under Section 17(5)(h)
Section 17(5)(h) presently provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Consequently, where a manufacturer distributes products free of cost for promotional purposes, the ITC attributable to those products is generally blocked.
This restriction applies even where samples are distributed exclusively for increasing turnover, introducing products or promoting future taxable sales.
Existing Law versus Proposed Amendment
| Particulars | Existing law | Proposed position |
|---|---|---|
| Free samples supplied to customers | ITC generally blocked | Potentially eligible, subject to final statutory wording and applicable conditions |
| Medicine samples distributed to doctors | ITC generally blocked | Potentially eligible, subject to final statutory wording and applicable conditions |
| Free promotional samples supplied to dealers | Generally blocked, subject to Schedule I exceptions | Potentially eligible; Schedule I/outward tax implications require separate examination |
| Samples supplied to industrial customers | Generally blocked where disposed of free | Potentially eligible, subject to final statutory wording |
| Free trial products distributed at exhibitions | Generally blocked | Potentially eligible, subject to applicable conditions |
| Buy-one-get-one offers involving one consideration | ITC generally already allowed | No additional relaxation required |
| Free gifts to customers | Generally blocked | No express general relaxation announced |
The proposed amendment specifically addresses free samples. It should not automatically be interpreted as removing every restriction contained in Section 17(5)(h).
2. CBIC Circular No. 92/11/2019-GST – Existing Departmental Clarification
CBIC Circular No. 92/11/2019-GST, dated 7 March 2019, explains the existing GST treatment of free samples, gifts and sales-promotion schemes. It establishes two important principles.
First – Outward GST Liability
Goods supplied free of cost, without consideration, are generally not considered a supply under Section 7 of the CGST Act, unless the transaction falls within Schedule I. Thus, ordinary free samples distributed to unrelated customers or medical practitioners generally do not attract outward GST.
Second – Input Tax Credit
Under the existing Section 17(5)(h), ITC attributable to inputs, input services and capital goods used in relation to free samples distributed without consideration is generally unavailable.
The Circular further recognises that where free distribution itself constitutes a deemed taxable supply under Schedule I, the corresponding ITC may be available.
Two separate questions therefore arise:
- whether GST is payable on outward distribution of samples; and
- whether ITC relating to those samples can be claimed or retained.
The proposed amendment primarily addresses the second question; it does not automatically change Section 7.
Consequential effect on the Circular: Once the proposed statutory amendment becomes effective, the existing clarification in Circular No. 92/11/2019-GST regarding denial of ITC on free samples will have to be read subject to the amended statutory provision and any consequential clarification or revised circular issued by CBIC.
3. How Can ITC Be Allowed When Free Samples Are Not Treated as Sales?
Section 16(1) does not require every inward purchase to result directly in a taxable outward sale. It permits ITC on qualifying goods or services used or intended for use in the course or furtherance of business, subject to other statutory provisions.
Businesses incur expenditure on advertising, promotional campaigns, marketing and product development without receiving separate consideration for each activity. Similarly, free samples may be distributed to promote future taxable sales.
Example – Pharmaceutical Samples
| Particulars | GST treatment |
|---|---|
| Medicines distributed to doctors | Free of cost |
| Consideration received | Nil |
| Whether treated as an ordinary taxable sale | Generally no |
| Whether outward GST is payable | Generally no, unless Schedule I applies |
| Business purpose | Promotion of taxable products |
| Section 16(1) business-use requirement | May be satisfied |
| ITC under existing Section 17(5)(h) | Generally unavailable |
| ITC after proposed amendment | Potentially eligible, subject to final statutory wording and applicable conditions |
The essential distinction is between a taxable sale and expenditure incurred for business purposes. A sample may not itself constitute an outward taxable supply, but the expenditure to manufacture and distribute it can still be connected with taxable business. The proposal seeks to remove the specific block that currently prevents ITC on these promotional goods.
4. Comprehensive Case-Wise Analysis of Free Samples
The following table explains the existing and proposed ITC treatment of twelve important business situations.
Table A – Free Samples Distributed in Different Business Situations
| Case | Practical example | Existing ITC position | Proposed position |
|---|---|---|---|
| 1. Pharmaceutical samples | Medicines supplied free to doctors to promote a new drug | Generally blocked | Potentially eligible, subject to final statutory wording and applicable conditions |
| 2. FMCG product samples | Shampoo, detergent or soap samples distributed to customers | Generally blocked | Potentially eligible, subject to final statutory wording and applicable conditions |
| 3. Cosmetic samples | Free trial packs of creams or perfumes | Generally blocked | Potentially eligible, subject to final statutory wording |
| 4. Food product samples | Small packs of biscuits or snacks distributed to prospective customers | Generally blocked | Potentially eligible, subject to final statutory wording |
| 5. Industrial chemical samples | Material provided by a chemical manufacturer for customer testing | Generally blocked where goods are disposed of free | Potentially eligible, subject to facts and final wording |
| 6. Textile samples | Small fabric samples supplied to prospective buyers | Generally blocked where genuinely given away | Potentially eligible, subject to final statutory wording |
| 7. Paint samples | Sample packs distributed to dealers or customers | Generally blocked | Potentially eligible, subject to applicable conditions |
| 8. Samples to distributors | Free stock supplied solely for promotional sampling | Generally blocked unless deemed-supply exception applies | Potentially eligible; Schedule I implications require separate examination |
| 9. Samples at exhibitions | Free trial-size products distributed at trade exhibitions | Generally blocked | Potentially eligible, subject to final wording |
| 10. Samples sent overseas | Goods sent to foreign prospects for evaluation without consideration | Depends on transaction and export provisions | Potentially eligible; export classification remains a separate question |
| 11. Product-testing samples | Material sent to laboratory for testing and consumption | Depends on ownership, use and disposal | Requires factual examination |
| 12. Free goods with paid goods | Buy one soap and get another under a single-price offer | ITC generally already allowed | No additional relief required |
The first nine situations represent commonly encountered product-sampling activities. Overseas samples require additional examination of export provisions; laboratory testing requires consideration of whether goods are actually disposed of as free samples or consumed during testing. Genuine buy-one-get-one schemes involving one consideration are different under existing law.
5. Practical Example – Calculation of ITC on Free Samples
ABC Pharmaceuticals Ltd. manufactures 100 medicine units: 90 are sold to customers and 10 are distributed free to doctors as promotional samples. Total GST paid on eligible raw materials is ₹1,800. Assume all units have the same input cost.
Comparison under Existing and Proposed Law
| Particulars | Existing GST law | After proposed amendment |
|---|---|---|
| Total input GST | ₹1,800 | ₹1,800 |
| ITC attributable to 90 sold units | ₹1,620 | ₹1,620 |
| ITC attributable to 10 free samples | ₹180 – blocked | ₹180 – potentially eligible |
| Total eligible ITC | ₹1,620 | ₹1,800 |
Assume the outward GST on the 90 units sold is ₹3,240.
| Particulars | Existing law | Proposed position |
|---|---|---|
| Output GST on taxable sales | ₹3,240 | ₹3,240 |
| Eligible ITC | ₹1,620 | ₹1,800 |
| Net GST payable | ₹1,620 | ₹1,440 |
| Potential tax saving | – | ₹180 |
The illustration assumes that:
- the final amendment permits the credit;
- no separate deemed-supply liability arises; and
- all other statutory eligibility conditions are met.
Presently, ITC attributable to the 10 samples is blocked. After implementation, the manufacturer may be permitted to retain that ₹180 and utilise it against GST payable on other taxable sales. ITC need not necessarily be utilised against GST on the very same goods, provided it is lawfully admissible and used in accordance with GST credit-utilisation rules.
6. Pharmaceutical Industry – Major Beneficiary
Pharmaceutical manufacturers distribute medicine samples to medical practitioners to introduce new medicines, promote products and generate future business. ITC attributable to those samples is currently generally blocked.
Practical Illustration
| Particulars | Amount |
|---|---|
| Cost of raw materials attributable to samples | ₹5,00,000 |
| GST on raw materials at assumed 18% | ₹90,000 |
| GST on attributable input services | ₹20,000 |
| Total attributable input GST | ₹1,10,000 |
Existing position: The company generally cannot retain ₹1,10,000 of attributable ITC if its medicine samples are distributed without consideration outside Schedule I.
Proposed position: The company may become eligible to retain the ₹1,10,000, subject to the final statutory wording and other eligibility conditions.
It should maintain:
- batch-wise production records;
- sample issue registers;
- stock movement records; and
- distribution records.
7. FMCG and Consumer-Products Sector
The proposed relaxation may similarly benefit makers of soaps, shampoos, detergents, cosmetics, packaged foods and other consumer products.
Practical Illustration
An FMCG company launches a new shampoo brand and distributes 50,000 promotional sachets without charge. Assume the following GST is attributable to manufacturing them:
| Particulars | Amount |
|---|---|
| GST on ingredients and raw materials | ₹35,000 |
| GST on packaging materials | ₹18,000 |
| GST on attributable manufacturing-related input services | ₹7,000 |
| Total attributable ITC | ₹60,000 |
Under existing law, this ₹60,000 is generally blocked to the extent attributable to the free samples. After the proposed amendment, the company may become eligible to retain this ITC, subject to the final statutory wording and other applicable conditions.
Difference Between Product Samples and Advertising Services
Where a company pays an advertising agency ₹2,00,000 plus GST to conduct a promotional campaign, the GST on ordinary qualifying advertising services may already be available under Section 16. Advertising services are not generally blocked merely because they promote products. However, goods actually disposed of as free samples, together with attributable inputs and services, are specifically affected by Section 17(5)(h). Businesses should distinguish the two categories.
8. Buy One Get One Free – ITC Already Allowed under Existing Law
A genuine buy-one-get-one-free scheme is generally treated differently from independent free distribution. CBIC Circular No. 92/11/2019-GST explains that where two or more goods are provided for a single consideration, the transaction is not necessarily an independently free supply of the second item.
Example
A soap manufacturer offers two soaps for ₹100. The customer pays one price for the combined package. Although advertised as one soap being free, the package is supplied for consideration. ITC relating to the goods is generally already available, subject to ordinary requirements.
Comparative Position
| Nature of transaction | Existing ITC treatment | Proposed benefit |
|---|---|---|
| Buy one soap and get another under one price | Generally allowed | No additional relief |
| Two products sold for one package price | Generally allowed | No additional relief |
| Free soap sample without any purchase | Generally blocked | Potentially eligible, subject to final statutory wording |
| Shampoo sample at a promotional stall | Generally blocked | Potentially eligible, subject to final statutory wording |
| Extra units in a genuine taxable single-price scheme | Generally allowed | No additional relief |
The key distinction is whether a genuine taxable single-price package is supplied or goods are distributed independently without consideration.
9. Free Samples versus Gifts
The Council has specifically recommended removing the restriction on free samples; its announcement has not expressly confirmed general relief for gifts.
| Particulars | Free samples | Gifts |
|---|---|---|
| Main purpose | Product promotion, testing or demonstration | Goodwill, appreciation or personal benefit |
| Example | Medicine sample supplied to a doctor | Gift hamper supplied to a dealer |
| Relationship with company product | Generally direct | May not be directly related |
| Consideration received | Normally nil | Normally nil |
| Existing ITC treatment | Generally blocked | Generally blocked |
| Proposed ITC relaxation | Specifically recommended | Not expressly confirmed |
A sample offered so that a prospective customer can test the company’s product is more clearly within the proposed relief. Putting a company logo on an item does not automatically turn a gift into a product sample.
10. Does a Free Sample Become an Exempt Supply?
Section 2(47) defines exempt supply by reference to nil-rated supplies, notified exemptions and non-taxable supplies. But where free goods are distributed without consideration and Schedule I does not apply, distribution is generally not a supply under Section 7.
Therefore, an ordinary free sample should not automatically be treated as an exempt outward supply merely because no GST is payable. There is a substantial legal basis for arguing that it should not automatically cause an exempt-supply reversal under Section 17(2). Instead, sampling may be an activity supporting taxable business.
Currently, however, Section 17(5)(h) expressly blocks the attributable ITC despite the business-use argument. Once amended, the interaction of Sections 16 and 17(2) will become more significant. The final legal wording will govern.
11. Important Legal Issue – Schedule I and Deemed Supply
Schedule I treats certain transactions as supplies without consideration. Paragraph 1 covers permanent transfer or disposal of business assets where ITC has been availed on those assets.
A question may arise once the free-sample ITC restriction is removed:
If a business purchases finished products, claims ITC and later distributes them freely as samples, could that transfer constitute a deemed taxable supply under Schedule I?
Facts may differ between:
- purchased finished goods with directly availed ITC; and
- manufactured samples using raw materials and input services.
Existing Circular No. 92/11/2019-GST treats ordinary free samples as generally outside supply unless Schedule I applies, but the interaction with any new credit entitlement will have to be considered.
Therefore, it would be premature to conclude that every free-sample transaction will automatically enjoy both full ITC and no outward GST liability.
The final amendment or a consequential CBIC clarification should address this interaction.
12. Will Outward GST Be Payable on Free Samples after the Amendment?
The proposed relaxation relates to Section 17(5), presently affecting free samples through Section 17(5)(h). It does not automatically amend Section 7 or Schedule I. Existing principles for determining outward supply therefore remain relevant.
| Transaction | Outward GST position | Potential ITC effect |
|---|---|---|
| Free samples to unrelated customers | Generally not payable, unless Schedule I applies | May become eligible, subject to final law |
| Medicine samples supplied free to doctors | Generally not payable, subject to Schedule I | May become eligible |
| Samples at trade exhibitions | Generally not payable, subject to Schedule I | May become eligible |
| Products included in a genuine single-price scheme | GST applies to taxable package | ITC generally already available |
| Free transfers covered by Schedule I | May be taxable deemed supplies | Existing deemed-supply rules remain relevant |
ITC eligibility and outward GST liability must be examined independently.
13. Conditions for Claiming ITC after the Proposed Amendment
Even where the free-samples block is lifted, other GST eligibility conditions will continue.
| Condition | Requirement |
|---|---|
| Business purpose | Samples distributed for genuine business or promotional purposes |
| Valid tax invoices | Proper invoices for inputs and input services |
| Receipt of goods or services | Relevant inward supplies genuinely received |
| Section 16(1) | Business-use requirement satisfied |
| GST compliance | Applicable reporting, tax payment and return requirements complied with |
| Personal consumption | Remaining personal-use restrictions considered |
| Exempt outward activities | Section 17(2) restrictions considered where relevant |
| ITC attribution | Actual credit associated with samples determined on a supportable basis |
| Proper records | Production, stock movement and sample distribution details retained |
| Statutory time limit | ITC claimed within applicable time limit |
The Council has not prescribed a separate free-sample credit-calculation formula. ITC should be based on actual eligible input tax attributable to samples, not merely a GST rate applied to their MRP or notional selling price.
14. Whether ITC of Earlier Financial Years Can Be Reclaimed
The Council has not expressly recommended retrospective application of the free-sample relaxation. Companies therefore cannot presently reclaim historically blocked ITC solely because the Council has recommended removing the restriction.
The final amendment must be reviewed to determine:
- whether relief is prospective or retrospective;
- whether transitional provisions apply;
- how Section 16(4) time limits apply; and
- whether credit previously availed and reversed is treated differently from credit never availed.
Until the change becomes effective, taxpayers should follow the existing Section 17(5)(h).
Conclusion
The proposed ITC relaxation relating to free samples, recommended by the GST Council on 8 October 2026, represents meaningful potential relief for genuine product sampling and promotion.
Under existing law, ITC attributable to free samples is generally blocked despite their use in promoting taxable business. The proposed change seeks to remove that restriction.
Section 16(1) permits credit for qualifying business inputs without requiring each purchase to result directly in a separate taxable outward sale.
Nevertheless, the treatment of free samples must be distinguished from genuine single-price buy-one-get-one schemes, gifts and deemed supplies under Schedule I.
The interaction between Sections 7, 16, 17(2), 17(5)(h) and Schedule I remains relevant in assessing whether both ITC and absence of separate output GST are supportable.
The exact legislative drafting is still awaited. Consequently, businesses should not assume that every item currently falling within Section 17(5)(h), particularly gifts, will receive the same treatment merely because the Council has recommended relief for free samples.
As of 20 October 2026, the proposed amendment has not been brought into force.
The enacted text will govern eligibility, timing, calculation, interaction with Schedule I and any transitional treatment.
