pri An Insight into Taxability of Free Samples under GST An Insight into Taxability of Free Samples under GST

Taxability of free samples under GST regime is the topic perturbing most of the professionals. Most of opinions regarding taxability of free supplies, prima facie, are based on the definition of Supply as per Section 7(1)(a) of Central Goods & Service Tax Act (herein after referred to as “Act”) which states that 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.

Based on this definition GST is not leviable as it doesn’t fall in the purview of Supply due to absence of consideration in this transaction.

As per Para 1 of Schedule I to Act, activities to be treated as supply even if made without consideration, of the Act, permanent transfer or disposal of business asset where input tax credit (hereinafter referred to as ITC) has been availed on such asset is treated as supply.

In case we supply goods on free sample, ITC of which is blocked as per Section 17(5), then we would be covered by Para 4 of Schedule II, Activities to be treated as Supply of Goods or Supply of Services, according to which where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person .

Business Asset has not been defined in the Act and hence it is where ambiguities start.

Let us look into the interpretation of Business Asset. According to general rule of interpretations, if the language used has a natural meaning we cannot depart from that meaning unless, reading the statute as a whole, the context directs us to do so. According to the plain meaning rule, absent a contrary definition within the statute, words must be given their plain, ordinary and literal meaning. If the words are clear, they must be applied, even though the intention of the legislator may have been different or the result is harsh or undesirable. The literal rule is what the law says instead of what the law means; as business asset is not defined, we have to consider its literal interpretation and therefore it will include every asset of business which also encompass finished goods.

Further input tax credit is available on raw materials satisfying the conditions laid u/s 16 of the Act. Assuming that conditions as prescribed are fulfilled, free samples are covered by Para 1 of Schedule I. Therefore, it can be deduced from above facts that GST is leviable on free samples.

Don’t reach to any conclusion yet, above stated facts represents only one side of the story; let’s have a look towards the other side of story-

As per subsection (5) of Section 17, 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;

As per the provisions of Section 17, ITC on Free Samples is blocked and it’s not an easy task for the supplier to bifurcate input tax availed for the purpose of supplying free samples.

Scrutinizing the above facts, we can draw two conclusions:

1. Free Samples are leviable to GST

2. ITC on Free Samples is blocked, hence reversal of ITC.

As ITC is not available on goods disposed off as free samples, as stated above, and if the same is leviable to GST, it will lead to double imposition of tax on the supplier. Furthermore, it is nowhere written in Section 17 that if GST is imposed on the goods given as free samples then ITC can be claimed. Considering the stated facts chargeability of GST on free samples is not conjunctive to availability of ITC.

Taking cognizance of law in force and until further clarification by the department, the provisions of Section 17(5)(h) should be followed. Also as per the settled proposition of law where the statute contains both, a general provision as well as a specific provision, the later must prevail.

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Disclaimer: Every Attempt has been made to provide all the compliances relating to free samples of goods at one place and keeping abreast of developments, an opinion has been expressed which represents the personal views of the author; and cannot be construed as professional advice or a formal recommendation. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided hereinabove.

Author Bio

Qualification: CA in Practice
Company: A Sethi & Associates
Location: Chandigarh, IN
Member Since: 13 Apr 2018 | Total Posts: 4

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  1. VIPIN NAMDEO says:

    Shri Ankit Sethi,

    Good observation. Business Assets (since not defined in GST Act) includes Finished Goods also.

    But i think there is intention of Law maker to charge double taxation on free Sample.

    In future, department will issue clarification on this issue.

    Thanks for sharing your valuable advice.

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July 2021