Free Samples are products given to consumers to try before purchasing. Providing free or sample products is a tried and tested marketing method used by various industries in India such as pharmaceuticals, FMCG, etc.
For example, Buy 3 and get 1 Soap free or 1 Garment free on purchase of 3 Garments or distribution of free samples to distributors, agents, customers, doctors, etc.
When does a product qualify as a free sample?
To qualify as a free sample, a product normally possesses the following features:
a) Distributed free of cost i.e without any consideration.
b) Are marked NOT FOR SALE and normally no MRP is printed.
GST is applicable when a transaction involves the supply of goods/services for consideration. Goods or services that are supplied free of cost (without any consideration) cannot be treated as ‘supply’ as per Schedule I of the CGST Act, 2017 except on activities specifically mentioned on which GST needs to be charged even when supplied without consideration. Section 17(5)(h) of the CGST Act, 2017 restricts ITC on goods disposed off by way of gift or free samples. Thus, ITC has to be reversed on goods distributed as free samples.
Output Tax Payment and availment of credit to a certain extent depend on the taxability at the time of supply of such free samples / free supplies. The same has been summarized below:
| CONDITION | OUTPUT TAX TREATMENT | ITC TREATMENT |
| Goods manufactured as free samples and then distributed | No output tax payable | ITC to be reversed |
| Goods manufactured as normal goods and then transferred as free samples | No output tax payable | ITC to be reversed |
| Goods manufactured as free samples and then distributed to RELATED PARTY | Output tax payable | ITC allowed |
| Free supply i.e. without any consideration | No output tax payable | ITC to be reversed |
| Buy one get one free offer | Output tax payable on assessable value | ITC allowed |
Which Activities are Treated as Supply Even If Made Without Consideration?
Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. This is not applicable when ITC was not availed on such assets.
Supply 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.
- By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
- By an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
If the agent is working on a commission basis and does not undertake goods, then there is no need to pay GST on goods but the agent needs to discharge GST on the commission earned.
Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
Further, as per Circular No. 92/11/2019 – GST issued by the CBIC released on 07th March 2019, states that any goods or gifts provided under the category of gifts, samples, and other related categories without consideration, it shall not become categorized as ‘supply’ as per the Act. Hence, the input tax credit shall also not apply to those said goods.
From Schedule I reproduced above, it can be noted that the supply of free samples does not fall under the category of activities to be treated as supply even if made without consideration.
How to disclose free Samples supplies in the returns?
Since the free Samples are not supplies, there is no requirement of disclosing the same as outward supplies in the returns. The credit relating to the same can be disclosed in Table 4 of Form GSTR 3B as Ineligible ITC under Section 17(5) or Credit Reversal under “Others” if credit was already availed.
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“Money” is defined u/s 2(75) of the CGST Act as
(75) “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;
Exchange of money on its own is excluded from the scope of GST other than the activities relating to the use of money or its conversion from one form to another for which a separate consideration is charged.
IF A WIFE TRANSFER MONEY TO HUSBAND’S BANK ACCOUNT AS A GIFT THEN GST IS APPLICABLE ?