GST on free supply of Goods

Festival season is again around the corner, promotional offers would be very common sights in the marketplaces. These promotional schemes are employed as an effective sales strategy to woo the customer for buying their products. Among the several promotional offers, free gifts, buy one-get one and flat discounts are some of the popular schemes. For newer products, to penetrate the market, the strategy of free samples is adopted. Under this approach, goods are supplied free of cost as samples, and it is very common practice in the pharmaceutical space. While this sales strategy is a proven and tested practice to improve sales, it isn’t that easy as far as GST implications are concerned. While determining the promotional offerings, the businesses are required to consider various tax implications of these schemes.

Introduction of Goods and Services Tax has changed the way business is done due to transformation in the indirect tax framework. Under the new GST law, the levy of tax has been shifted from the act of manufacture or sale to act of supply. GST is imposed on the supply of goods or services for a consideration. There are some activities that would still be considered as a supply even there is no consideration. There are several doubts amongst the taxpayers with respect to the treatment of free supplies of goods under the GST framework.

While the Goods and Services Tax is exempt for individuals with whose annual turnover is less than INR 20 lakh, what is excluded/ included while computing the total turnover? As per the provisions contained u/s 22 of the CGST Act, 2017, a supplier is required to be registered in the state or Union Territory, from where such supplier is making the taxable supply of goods or services, if the aggregate value of his turnover in the financial year is more than INR 20 lakhs (INR 10 lakhs for special category states). Here, the aggregate turnover includes the following:

• Supply of goods or services that is chargeable to tax under GST Act
• Supply of goods or services that attracts no tax or which is wholly-exempt from tax and also includes non-taxable supply
• Stock transfers between different states
• Export of goods and services

Section 17(5) of the CGST Act, 2017 limits the input credit on goods which are issued as free samples. It is clear that when the credit availed goods are offered as free samples, the credit relating such goods would not be allowed. However, there is a doubt that arises is whether the restriction is valid on the free sample of finished products which are manufactured out of input tax credit availed inputs too? CBEC in their sectoral series on ‘Drugs and Pharmaceuticals’ has clarified that on the physician samples, GST isn’t payable as the value would be nil and no credit could be availed. From this explanation, it can be established that the reversal of credit is required in the case of finished goods too. Sometimes it could be difficult to identify the exact amount of credit on inputs used in finished goods.

The model GST law which was released in June 2016 detailed the scope and meaning of supply that was extremely broad and wide. The definition covered each supply made by the registered supplier even without any consideration in furtherance of his/her business. Due to this, all the samples which are distributed by the registered supplier would be charged to Goods and Services Tax. This has a key impact on the FMCG industries since they are typically engaged in the distribution of free samples for marketing and advertisements. GST on such transactions was a big setback for the FMCG industry. Hence, the GST council solved this issue in the CGST (Central Goods and Services Tax) Act 2017 which offered relief to the taxpayers by revising the Schedule 1 of Section 3(1)(C).

The scope of the schedule 1 is now limited only to:

• Permanent transfer or disposal of the business assets on which Input Tax Credit has been availed
• Import of services from the related persons or distinct person as stipulated in Section 25
• Supply of goods or services by a Principal to an agent, an agent to his/her principal, between the related persons or distinct persons.

It implies that any supply made by the taxable persons to their agent or principal or among the related parties would be liable to Goods and Services Tax, however, the supply of goods or services to the registered or non-registered persons for the purpose of sales promotion, advertisement or feedback would be exempt from the purview of GST.

It has cleared most of the doubts with respect to the taxability of free supplies and it could be safely established that the free samples supplied for the purpose of advertisement or such other purposes would not attract GST.

Though it should be noted as per Section 17(5)(h) of the CGST Act, no input tax credit would be available if the goods are disposed off by way of free samples or gifts.

The Bottom Line

Free supply of goods or services are business activities which do not amount to supply, similar to other several business activities where the inputs or input services are used up by the supplier. The inputs could be used for the purpose of testing, sampling, market research, trial etc. from which there is no generation of revenue for the supplier.