INPUT TAX CREDIT ON FREE SAMPLES

Section 16(1) of the CGST ACT Provides that every registered person entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used, in the course of furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 17(5)(h) of the IGST ACT Provides that No input tax credit is available if goods lost, stolen, destroyed , written off or disposed off by way of gift or free sample.

Hence on combined reading of the above, Input tax credit on inputs & services used in free sample should be reversed.

TAXABILITY OF FREE SAMPLES

For the purpose of taxability of free samples we need to examine following aspect:-

1. Taxable Person

2. Taxable Event

3. Taxable Rate

4. Taxable Value

1. Taxable Person: – Section 2(107) provides that taxable person is a person who is registered or liable to be registered u/s 22 or 24 of the CGST Act.

For the purpose of taxability of free samples, person should be registered.

2. Taxable Event – GST shall be levied on the supplies of Goods & Services. It means Taxable Event will arise when Good & Services are supplied.

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It means we need to understand supply. Supply covered under section 7 of the CGST Act that:

  • Supplies Made for Consideration
  • Supplies specified in Schedule I or Schedule II

Schedule-I provided that activities to be treated as supply even if made without consideration:

Point No. 1 permanent transfer or disposal of business assets where ITC has been availed on such asset. In our case ITC has not been availed therefore it does not fall into the criteria.

Point No. 2 covers supplies of Goods or Services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business without consideration.

Hence Free Samples to unrelated persons are not covered under definition of supply. Criteria of taxable supply are not fulfilled in case of free samples. If supply has not been done, Taxable event will not arise.

3. Taxable Rate: – Rate of Tax will be similar if the same product is sold as taxable product.

4. Taxable Value: – Valuation Rules provides the mechanism to calculate taxable value if the consideration is not wholly in money. Hence taxable value is out of the following:-

  • Open Market Value
  • Sum Total of consideration in money.
  • Value of goods or services or both of like kind and quality
  • Value as per rule 4 or 5 of valuation rules.

Thus, Free Samples are not liable to GST as the same are not form a supply.

Free Promotional Item with Taxable Product:

If free promotional item is provided with the taxable product than the consideration for the same will be value charged from the consumer.

For the purpose of input tax credit on the promotional item, there is no restriction in the law. Hence, input tax credit on Promotional item along with taxable product is available.

Also in the GST Tweet, It is mention in the Q.55 that in case of promotional item given free to end consumer, than tax will be charged on the total consideration charged for such supply.

It can be understand with the following example:

Q.1

Mr. A supplied a mobile phone along with free data card for Rs. 18,000. Cost of the data card is Rs. 1,800.

  • Price of the mobile phone in open market is Rs. 17,500.
  • Price of the mobile phone in open market is unknown.

A.1

  • In first case value of supply will be Rs 18,000.
  • In second case Price of the phone will be same as Rs. 18,000.

Q.2

Mr. A Selling a set of Soap which provides offer of Buy 1 Get 1 free. Consideration charged for the soap is Rs. 30. What will be the taxable value?

S.2

In this case taxable value should be Rs. 30 as consideration charged from the consumer.

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Qualification: CA in Practice
Company: A K Sethi & Associates
Location: 16.JAIPUR / जयपुर, Rajasthan, IN
Member Since: 12 Jun 2017 | Total Posts: 5

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13 responses to “Free Samples & Promotional Items under GST”

  1. NARAYAN M SHETTY says:

    WE ARE THE GARMENT MANUFACTURER.
    WE PURCHASE SOME PROMOTIONAL ITEMS LIKE LAPTOP BAGS & SEND THE WHOLESALERS @50% RATE. THE WHOLESALER GIVES FREE TO THE RETAILERS ON THE SALES OF GARMENTS
    WHEN WE SELL THE PROMOTIONAL ITEMS TO WHOLESALERS WE WERE LAIBLE TO GST OR NOT. PLEASE CONFIRM

  2. Suresh says:

    I have purchased 10 laptop for distributing such laptop if distributors gives more sales..
    I m not trading in sale of laptop.
    What should be the treatment of my purchase of 10 laptop as it is not my stock or not fixed assests..

  3. Vinay says:

    Helpful article

  4. Alkesh says:

    Is required to pay GST on quantity discount mentioned in Tax Invoice?

  5. Chandra says:

    What’s about machine and spares sent to sub-contractor on lease basis. Whether he is eligible to avail GST? GST paid @ 28% for non excise spares, since VAT ITC availed.
    Is it right process?

  6. Amit Sharma says:

    Supply covered under Section 7 need to be explain more. If you are indicating Section 7 then explain the whole. If a layman read the article he make ensure himself that there are only two lines in Section 7 what you have mention above. You may start your sentence ” From Section 7 of CGST Act, the scope of supply also includes……….., if you do not want to write whole of Section 7

  7. Amit Sharma says:

    Schedule 1 contains Paras not points.
    As you mention that Point 2 covers “………without consideration”
    But in Para 2 there is no such word like Without Consideration. Schedule 1 mention the heading ” Activities to be treated as supply even if made without consideration”. Again you can’t change the language of law. You could mention the word ” without Consideration” as your own line of expression.

  8. Amit Sharma says:

    Please correct instead of Section 17(5)(h) of IGST Act it should be Section 17(5)(h) of CGST Act.

  9. Amit Sharma says:

    First of all you are not suppose to change the words or line if you are starting you article indicating as per Section “….., Secondly, correct the line in Section 16(1) ” in the course or furtherance of his business”

  10. vaibhav says:

    Sir, please clarify when the medicines are given to doctors as sample, whether GST would be levied or not.

  11. Mahesh Shaha says:

    What is the provision for Freight Charges in GST

  12. Sachin says:

    sir it is very narrative and helpful. Please also write on warranty claim and its treatment under GST.

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