Impact of GST on Free and Sample Products

In a fast growing, competitive market, one of the most effective ways to gain new customers is to give away free and sample products. Providing free or sample products is a tried and tested marketing method used by various companies in India and in this article, we review the applicability of GST on free and sample products in detail.

Incidence of GST on Supply of Goods and Services

The Goods and Services Tax (GST) regime has introduced the concept of ‘supply’ as a taxable event and done away with the erstwhile taxable events of sale, service, manufacture, etc.

Section 7 of GST Act deals with the term supply and the it states that Supply includes:

• All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business
• Activities specified in Schedule I, made or agreed to be made without a consideration.

The provisions of schedule I are reproduced hereunder where following activities are to be 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.
• 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: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
• Supply of goods –

1. By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

2. By an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

3. 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

Moreover, as per subsection (5) of Section 17, notwithstanding anything contained in Section 16(1) and Section 18(1) of CGST Act, 2017, input tax credit shall not be available in respect of the following, namely:—

….. (h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;

Applicability of GST on Free and Sample Products

A conjoint reading of Section 17(5)(h) of CGST Act, 2017 and Schedule I to CGST Act, 2017 demands harmonious interpretation of law. Such harmonious interpretation clearly indicates that if the goods are disposed of by way of gift, section 17(5)(h) of CGST Act, 2017 shall be applicable and accordingly input tax credit in respect of the same shall not be allowed. Thus, the same shall not be considered as supply (Schedule 1 to the CGST Act) and hence GST will not be applicable on such free samples. However, if such goods are disposed of by any way other than gift, then the same shall be considered as supply in terms of Para stated above and accordingly shall be exigible to GST and reversal of credit shall not be required.

Further, it also essential to bring to your attention the CBIC’s Sectoral FAQ ( available on CBIC website where following has been provided:

Question – What are the requirements for clearance of physician samples distributed free of cost?

Answer – In case of clearance of physician samples distributed free of cost, the ITC availed on the said samples has to be reversed in view of the provisions under Section 17(5)(h) of the CGST Act, 2017. No tax is payable on clearance of physician samples distributed free of cost as the value of supply is zero and no credit has been availed.

Hence according to section 17(5) of the CGST Act, input tax credit will not be available for goods given as gifts or free samples. Thus, if the taxpayer avails the input tax credit on account of a purchase of goods, and later gives these goods as free samples, then he will have to reverse the input tax credit so availed.

Distribution of Samples thorugh Branches

Further, we would like to deal a scenario where a company distributes free samples through its branches. In such a case, transfer of free samples to the branch, being related person, shall be exigible to GST and further input tax credit in respect of such samples shall be allowed to the distributing branch. However, recipient branch needs to reverse the input tax credit of GST paid on such samples to the distributing branch at the time of giving these free samples to its customers.