Goods and Services Tax (GST) is the new indirect tax regime introduced by the legislature in the year 2017 through the 101st Amendment of the Constitution of India.[1] GST sought to replace multiple existing indirect taxes levied by Central and State governments on goods and services. The Central Goods and Services Tax Act, 2017 (CGST Act) provides for imposition of GST as a single domestic indirect tax throughout the country. GST is applicable on the supply of goods and services for which the charging section is Section 9 of the CGST Act which levies GST on all intra-State supplies of goods and services.[2]

The GST regime is new in India and its jurisprudence is evolving. In 2016, when the proposed Model GST Law was introduced, one of the issues was regarding the taxability of free goods and services supplied by businesses. While the GST law doesn’t define the term ‘free supply’, it is generally understood as supply of goods and services by a taxable person registered under GST without a consideration. For example, some businesses provides for a scheme wherein one free good would be provided when a customer purchases two goods. In order to avail the free good, customers will have to purchase two goods first, which shall benefit the business. Hence, in this case how the free supplies shall be taxed under GST is an issue.

Prior to the GST regime, Excise duty was applicable on the manufacturing of goods irrespective of the sale of goods and VAT was applicable on the value of sale. The value of free goods was not added to the value of sale and thus, such value was not considered for the application of VAT.[3]

The GST regime had no provision for ascertaining the taxability of free supplies until 2019. Thus, to avoid uncertainty, double taxation at output and input stage and litigation, the need for a clarification aroused. This article shall analyze the latest circular issued by the Central Board of Indirect Taxes and Customs (CBIC) in 2019 providing clarification on the issue concerning the taxability of free supplies under the GST regime.[4] 

Position of Free Supplies under CGST Act

GST shall be applicable on the supply of goods and services. The term supply is defined under Section 7(1) of CGST Act which includes[5]:

a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; and

b) the activities specified in Schedule I, made or agreed to be made without a consideration.

Thus, GST shall be applicable on the supply of goods and services specified in Section 7 and Schedule I of CGST Act where even goods supplied by a business without consideration are included.

Schedule I includes permanent transfer or disposal of business assets where input tax credit (ITC) has been availed on such assets and supply of goods or services between related or distinct persons specified in Section 25 when made in course or furtherance of business. A provision clause in Schedule I states that gifts between employer and employee not exceeding fifty thousand rupees in value in a financial year shall not be treated as supply.[6]

The term business assets or gifts has not been defined anywhere in the Act. It is a common understanding that when the statute does not provide a definition its literal interpretation should be considered.[7] Thus, a business asset shall include any asset which the business owns and maintains a record of it in its balance sheet. Inventory is considered to be a business asset which implies that GST shall be levied on all goods supplied even for free under sales promotional schemes if ITC has been availed on it.

ITC under Section 2(63) of CGST Act means the credit on input tax. It is a provision to avoid double taxation by ensuring that businesses get credit at the time of paying tax on output for having paid input tax on purchases.[8] Section 17(5) of CGST Act provides for credit restrictions on ITC. Section 17(5)(h) restricts the benefit of credit concerning the goods supplied either as ‘gift’ or ‘free samples’.[9] The term ‘gift’ is not defined under GST Act but it is provided under Gift Tax Act, 1858 which states that it is essentially a transfer of movable or immovable property by one person to another voluntarily and without consideration.[10]

There was an ambiguity as to the applicability of GST on such gifts or free supplies which are business assets or the provision of reversed ITC to such free supplies or gifts. This causes the issue of double taxation where the law is charging taxes on output as well as input of free samples. Further, the application of Section 17 of CGST Act shall restrict the application of Schedule I and vice-versa. This shall create two independent provisions within the same law that are contradicting the impact of other.[11] This ambiguity impacted several sales and marketing promotional schemes such as buy one get one free, buy more for the same price, and other discounts which were provided by the companies to its customers. 

Critical Analysis of Provisions Related to Free Supplies

CBIC issued a set of Frequently Asked Questions (FAQs) and provided answers for the purpose of clarifying the position and the intent of law. This was done to avoid such ambiguities because of which disputes arose between the taxpayers and the authority. Some of the questions are on the taxability of free supplies by businesses which are mentioned below.

> In the case of goods supplied as free samples to customers or physicians (in the pharmaceutical sector), the law under Section 17(5)(h) of CGST Act is clear as they are free samples thus ITC shall be reversed. The rationale behind this provision is that these samples are free and have zero value attached to it, on which no tax can be levied and hence, no credit shall be provided.[12] Further, no output liability would arose on such transfer.

>  Other marketing schemes such as buy one, get one free or buy more and save more are used by various business to boost its sales. CBIC’s FAQ clarifies the charge on GST on such free supplies. It states that the value of free good is to be considered as trade discount where offering two goods at the same price is equal to offering one good at 50% discount. Thus, the invoice value would include both goods and GST will be charged on the invoice value of supply. Therefore, need for reversing the ITC under Section 17 will not arise in such a situation. Further, such goods are considered as supplies and not gifts as they are given for free to incentivize buyers to buy goods of the company and thus, ITC can be claimed on it.[13]

Moreover, gifts provided by the companies to its customers or suppliers or clients cannot be considered as business promotion as it is a common understanding that they are given to maintain good relations with the other party and not for inducing them to buy the products or services of the business. Section 17(5)(h) of CGST Act mandates that ITC on such gifts shall be reversed.

However, if gifts provided are goods produced by the business, then such gifts can also be considered as business assets as per Schedule I and ITC can be availed on them. This creates ambiguity because on a conjoint reading of Section 17(5)(h) of CGST Act with Schedule I of CGST Act, if goods are provided as gifts then ITC will be reversed. However, if such goods are business assets and if no ITC is availed, then they cannot be considered as supply and GST will not be applied on such goods.[14]

There was no clarity on this issue and it caused a lot of litigation as such goods may be considered as gifts and ITC may be reversed although they were provided to boost the sales of the company as a part of supply and get benefit out of it. To avoid the trouble of litigation, it is essential for the company to highlight that such gifts were distributed to incentivise the distributors rather than maintaining good relations to avoid their case from the imposition of Section 17(5)(h) which will make them to reverse ITC availed on such gifts. Further, if in a situation wherein the free supplies has been made to an unrelated person who doesn’t comes under the ambit of Schedule I, then this transaction will not be termed as supply under the Act and hence will not be taxable. Subsequently, ITC claimed will be reversed.

In the recent case of Biostadt India Ltd. (Applicant), the Maharashtra Authority for Advance Ruling (AAR) held that ITC on gifts will not be available and hence there will be no GST levied on them. The issue revolved around reversal of ITC on distribution of gold coins by the Applicant for promoting its sales. ITC was reversed on the ground that the distribution of gold coins was not the business model of the Applicant and it was not an essential in the continuity of business.[15]

Thus, the gold coins were not distributed for promoting sales but as a gift under Section 17(5)(h) of CGST and ITC would be reversed on such gifts. However, the case did not clarify the position of law with respect to goods which are business assets and have been supplied as gifts.

In 2019, the GST Policy wing issued a Circular on 7th March which clarified the position of free supplies under GST law. According to the circular[16]:

1) Free samples and gifts shall not be considered as supply and ITC availed shall be reversed as Section 17(5)(h) would be applied in this case, unless such free samples fall within the ambit of Schedule I where ITC is availed then GST shall be levied.

This clarification makes it clear for business assets which are provided as gifts for promotional schemes to benefit the company. ITC shall be available as long as such goods fall under the activity of supply as per Schedule I of CGST Act.

2) Free cost of goods such as in offers such as buy one, get one free shall be considered as mix supply (some goods are provided for free of cost) and GST shall be levied under Section 8 of CGST Act. Further, ITC shall be availed because the value of such goods include the free supplies and they are considered as supply or part of supply.

3) In cases of volume discounts such as buy more and save more offers, it has been clarified that such discounts are entered at the time of sale but determined at the end of the year after GST has been levied on the invoice value. The discounted value shall be reduced from the value of supply according to the conditions under Section 15(3) of CGST Act which includes reversal of ITC by recipient of supply. It is clarified that ITC shall be available to the supplier on the input tax in relation to the discounted supply of goods or services. 

The Way Forward

The Circular provided clarification on free supplies that were used by various companies to improve their sales and marketing promotion which would benefit the company. However, such clarifications by CBIC in the form of FAQs, a circular and the ruling of the Maharashtra AAR provided light to the issue of free supplies of goods such as samples and buy one, get one. There is no clarity on the treatment of complementary services under GST law. Such services are also used by companies in their sales and marketing schemes to promote themselves. For example, if on a stay for 2 days in a hotel, a person receives spa services for free or a complimentary breakfast which essentially are services under the Act, will GST be charged on these services or will ITC be reversed under Section 17(5) of the CGST Act.

Therefore, it would be ideal for CBIC or the GST Policy wing to issue clarifications on the treatment of such services to avoid litigation from the Tax Department.

Further, a similar issue with respect to taxability of complimentary free tickets arose in the case of KPH Dream Cricket P Ltd. In re[17] wherein even though there was no consideration, the AAR Punjab held that these tickets issued free for IPL cricket matches will come under the definition of the term ‘supply’ and should be made taxable. But the author would like to differ from the point of view of the AAR. In the opinion of the author, since this supply was not directed to any specific or related or distinct person as under Section 25 of the Act, hence tax should not have been levied on this. Further, ITC should be reversed on the common input services on proportional basis. 


The Circular issued on 7th March, 2019 provided light to the issue of treatment of free supplies of goods under GST laws which shall create a correct position of such free supplies under the law. Now, the companies can avail benefit as they can now restructure their promotional schemes to ensure that they benefit from maximum availability of ITC on their input purchases.

Further, much needed clarification was provided by the CBIC on the taxability of goods forming part of business assets of the supplier supplied by way of gifts. This clarification will now help in avoiding unnecessary claims by the authorities under the CGST Act.

Lastly, the GST regime in India is developing and there is a need for more clarification on the treatment of free supplies of services as a part of business operations of the supplier. The law is silent on this issue and thus, can create possibility of issues in the future, which may result in demands from the Tax Department or costly litigations.

[1] The Constitution (One Hundred and First Amendment) Act, 2016, §12, No. 55, Acts of Parliament, 2016.

[2] The Central Goods and Services Tax Act, 2017, §9, No. 12, Acts of Parliament, 2017.

[3] NM Goel & Co. v. Sales Tax Officer, Rajnandgaon, 1989 AIR SC 285.

[4] CBIC-GST Policy Wing, Circular No. 92/11/2019-GST on 7th March 2019, 92.pdf;jsessionid=DB96C974D4455AED85851FB043C3DD47.

[5] The Central Goods and Services Tax Act, 2017, §7(1), No. 12, Acts of Parliament, 2017.

[6] The Central Goods and Services Tax Act, 2017, Schedule I, No. 12, Acts of Parliament, 2017.

[7] Ekta Gurjar, Literal Rule: A Tool for Statutory Interpretation, Ssrn 1,4 (2012).

[8] The Central Goods and Services Tax Act, 2017, §2(63), No. 12, Acts of Parliament, 2017.

[9] The Central Goods and Services Tax Act, 2017, §17(5)(h), No. 12, Acts of Parliament, 2017.

[10] The Gift Tax Act, 1958, 2(xii), No. 18, Acts of Parliament, 1958.

[11] Harpreet Singh & Saurabh Upadhyay, Free of cost supplies – Are they actually free under GST, Gst Sutra (Sept. 11, 2020, 12:17 PM),

[12] CBIC, Sectoral FAQs- Drugs & Pharmaceuticals: Question 2, CBIC (Sept. 11, 2020, 12:22 PM),

[13] CBIC, Sectoral FAQs- Invoice & Returns: Question 8, CBIC (Sept. 11, 2020, 12:24 PM),

[14] Singh & Upadhyay, supra note 9; CA. Krunal J Davda, Impact of GST on Free Supplies & Free Samples, Icai-Indirect Taxes Committee (Sept. 11, 2020, 12:32 PM), http://idtc 19/impact_on_GST_on_free_supplies_and_free_samples.pdf.

[15] In Re Biostadt India Ltd., 2019 (22) G.S.T.L. 551 (TS-911-AAR-2018-NT).

[16] CBIC-GST Policy Wing, Circular No. 92/11/2019-GST on 7th March 2019

[17] In re K.P.H. Dream Cricket (P.) Ltd., (2019) 089 ITJP (G) 0391 (AAR-Punj).

Authors: Varun Akar (5th year law student at Institute of Law Nirma University) and Ashuthosh V (3rd year law student at Institute of Law Nirma University).

Author Bio

Qualification: Student- Others
Company: N/A
Location: Jaipur, Rajasthan, IN
Member Since: 28 Jul 2020 | Total Posts: 1

More Under Goods and Services Tax


Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

May 2021