Model GST Law was released in the Month of June 2016 wherein Meaning and scope of supply was given in Section 3 of Law. Section 3(1)(c) stated that goods or services delivered even without consideration will be treated as supply provided it is covered in Schedule I. Heading of Schedule I was MATTERS TO BE TREATED AS SUPPLY EVEN WITHOUT CONSIDERATION. V point of Schedule stated that supply of goods or services to another taxable or non taxable person even without consideration will be treated as supply. Scope of this point was very wide. It meant that any supply made by any registered person free of cost will be charged to GST if it is made in the course of business. As a result of this clause, all the samples distributed by a registered person will be charged to GST. It has a major impact on FMCG industries as they are generally involved in distribution of samples for advertisements and feedback. GST on these transactions was a great setback for the industry.
However, Central Goods and Services Tax Act 2017 provided relief to the industry. Scope of Schedule I is now restricted only to permanent transfer or disposal of business assets on which ITC has been availed, Import of services from a related person or distinct person as specified in Section 25 (i.e. entities having same PAN) and supply of goods or services by Principal to agent , agent to principal , between related persons or distinct persons.
This means that any supply made by a taxable person to his agent or principal as case may be or among related persons will be charged to GST. However, distribution of goods or rendering of services by FMCG industry or any other industry as such to the registered or non registered persons for advertisement, sale promotion or feedback will be exempt.
While discussing this, it cannot be ignored that Section 17(5) clearly states that ITC will not be allowed in respect of goods distributed as free samples or gift.
Thus, it can be concluded that on free samples GST is not charged by the Act however it prohibits ITC on same.