GST is at a very tender age and thus there are many issues in the law which need deeper analysis and understanding so that better compliance may be enabled. Goods transferred without consideration is one such issue which continues to create confusions in the minds of taxpayers. Such goods may take the shape of free gifts, free samples etc. This article is thus an attempt to analyse this issue in a practical manner so as to enable readers to have a practical understanding of the same.

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Distribution of principal goods dealt with by a company as free samples to its distributors, agents, customers, doctors etc. forms a major part of the marketing strategy of many sectors such as pharmaceuticals, FMCG etc. Let us analyse its GST implications in details:

Whether falls within the definition of Supply:

To qualify as a free sample, a product normally possesses the following features:

a) Distributed free of cost.

b) Are marked NOT FOR SALE and normally no MRP is printed.

Section 17(5)(h) of the CGST Act, 2017 restricts ITC on goods disposed off by way of gift or free samples. Thus, ITC has to be reversed on goods distributed as free samples.

Now the question arises as to whether the same is a supply under Section 7 of the CGST Act, 2017?

Section 7 of the Act gives an inclusive definition of the term supply and states that goods without consideration shall not be treated as supply. Since samples are distributed free of cost, the same cannot be termed as supply under the said provision. Further, Schedule I of the Act states as under:

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.

Thus, a question arises whether free samples manufactured by an entity from duty paid goods on which ITC is availed is a transfer under this provision. According to the views of the author, since ITC on the same is to be reversed in terms of section 17(5)(h), Schedule I does not get attracted in the instant case. Further, Sectoral FAQs issued by the CBIC gives more clarity to the issue which states as under:

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.

Further, Circular No. 92/11/2019-GST Dated 07.03.2019 issued by the CBIC states that any goods distributed as gifts, samples etc. without any consideration does not come within the ambit of ‘supply’ under the Act. Thus, input tax credit on such goods shall also not be available.

Thus, a plain reading of both the FAQ and Circular clears the position of law as under:

a) ITC availed on purchase or manufacture of goods distributed as free samples is to be reversed u/s 17(5)(h).

b) No Output GST is to be paid on such transfer.


Suppose A in Guwahati transfers goods for sample to its branch office B in Shillong. In such a case, the following procedure shall have to be followed:

a) Since sample goods are sent to B which is a related party for A, transaction value shall not be considered to be the value of supply of goods, but shall be governed by CGST & SGST Rules. Let us assume that the value of goods taken by A as per the rules is Rs. 100/-, and GST charged is Rs. 18/- on such value.

b) Now, A can avail full ITC in respect of inputs used to manufacture the sample goods since it is not distributed for free to B.

c) But, since B distributes the goods as free samples to its distributors, dealers, customers etc., it has to reverse ITC on purchase of such goods from A i.e. Rs. 18/- in terms of Section 17(5)(h) of CGST Act.

Thus, head offices need to do proper tax planning to ensure that they are not taxed in excess of what they should be liable to pay.




Gift has not been defined under the CGST Act. However, as per Gift Tax Act, 1858, gift means:

Section 2 (xii) “Gift” means the transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or moneys worth and includes transfer or conversion of any property referred in Section 4, deemed to be a gift under that section.

Thus, to constitute a gift, the following main elements are to be present:

a) Transfer by one person to another

b) Voluntary transfer

c) Without consideration

Now, in case of gifts, Section 17(5)(h) gets attracted and a plain reading of the sections leads us to the conclusions that in case of gifts, ITC relating to such goods has to be reversed. However, in the opinion of the author, since gifts to distributors, dealers, customers etc. are given in expectation of future business from them, it is not considered as gift as it cannot be said to be without consideration. Thus, ITC should be available on such supplies. Reliance can be placed on the judgement delivered by the Hon’ble High Court of Australia in the case of Federal Commissioner Of Taxation v. McPhail, (1968) 117 CLR 111, which reads as under:

“6. But it is, I think, clear that to constitute a “gift”, it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return. In my opinion, neither of these conditions was fulfilled in the present case. The taxpayer gave an undertaking to the School Council to contribute 15 pounds per term to the Fund and coupled with that undertaking a request to be charged fees at the rates set out in schedule G. The School Council granted his application and charged him accordingly. In the result, it seems to me, there came into existence a contractual obligation on the taxpayer’s part to pay those fees and to contribute to the Fund and on the part of the School Council an obligation to provide education facilities for the taxpayer’s son for the appropriate fee set out in schedule G. The payment of 15 pounds was not a voluntary payment. In the events that happened it was a payment made pursuant to a contract between the taxpayer and the School Council. If, however, the payment should be regarded as a voluntary payment, the taxpayer made it in the expectation that in return he would receive, and he did in fact receive, a substantial concession in the fees charged for the education of his son. In neither event did he make a “gift” within the meaning of s. 78 (1). (at p117)”

However, department will always try to prove that there is no such benefit accruing and the assessees will have to prepare themselves with strong contrary arguments.


Free supplies are supplies made without any consideration. However, the treatment of such supplies under the following situations have been narrated below:

1) Unrelated Persons:

Free supplies to unrelated persons do not fall within the definition of supply u/s 7(1) of the Act and thus no GST is leviable on the same. However, in terms of Section 17(5)(h), ITC related to free supplies has to be reversed.

2) Related/Distinct Persons:

Free supplies to related/distinct persons are treated as supplies under Para 2 of Schedule I and thus the transaction value shall be determined in terms of Section 15 of CGST Act, 2017 read with Valuation Rules under CGST Rules, 2017.

Buy one get one free offer:

If one item is being given free of cost with another item, the same cannot be said to be distributed in free. In fact, it shall be two or more individual supplies supplied at a single price and thus input tax credit shall be available on such supplies. Further, the transaction value of the main item shall be considered to be the value of the entire supply. Reliance may be placed on the decision of the Delhi Tribunal in the case of Surya Food & Agro Limited vs Cce, 156 (2003) CLT 488 which reads as under:

6. Going by the facts and the decision of the three Member Bench of the Tribunal in Bombay Latex & Dispersions Pvt. Ltd. the real question is whether the gift or delivery was really in the nature of trade discount for the benefit of the wholesaler. The decision does not make any distinction between a case where the gift articles are bought-out items or items different from the excisable goods and the case where the gift articles supplied are of the same kind as excisable goods. The ultimate question is what exactly the price which the wholesale dealer is required to pay to the manufacturer. If 13 units of excisable goods are supplied to a wholesaler who would pay on the price of only 12 units, it is in the nature of trade discount by way of quantity discount. Trade discount may be in cash or in kind. There is nothing in principle to suggest any differentiation between trade discount in kind of goods identical to excisable goods or of goods different from excisable goods. Where the additional goods supplied are identical to the excisable goods, one may call the same quantity discount in kind. Where the articles are dissimilar, nevertheless, it would be an instance of discount in kind though not quantity discount……………………

4. It remains clear from the above that quantity discounts given, irrespective of manner of administering, are eligible for deduction while fixing the assessable value of excisable goods which are subject to duty on ad valorem basis. This principle remains clarified in regard to goods bearing MRP under the aforesaid Circular of the Board.

Free Supplies from Customers

There may be situations where goods such as tools, dies, moulds etc. are supplied by the customers to the manufacturer for use by them in production. Confusions arose regarding the valuation of such free supplies by the supplier. Accordingly, the Government has issued Circular No. 47/21/2018-GST dated 08-06-2018 to clarify such issues. The Circular reads as follows:

Issue Clarification
Whether moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case? 1.1 Moulds and dies owned by the original equipment manufacturer (OEM) which are provided to a component manufacturer (the two not being related persons or distinct persons) on FOC basis does not constitute a supply as there is no consideration involved. Further, since the moulds and dies are provided on FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of input tax credit availed on such moulds and dies by the OEM.

1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).

1.3 However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on such moulds/dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business.


For a better understanding of the above provisions, let us analyse certain conditions as discussed above in a tabular form and their Output Tax/ ITC treatment:

Sl. No. Condition Output Tax Treatment ITC Treatment
1 Goods manufactured as free samples and then distributed No output tax payable ITC to be reversed
2 Goods manufactured as normal goods and then transferred as free samples No output tax payable ITC to be reversed
3 Goods manufactured as free samples and then distributed to RELATED PARTY Output tax payable ITC allowed
4 Free supply i.e. without any consideration No output tax payable ITC to be reversed
5 Buy one get one free offer Output tax payable on assessable value ITC allowed

Thus, we observe that though some clarity has been given by the Government from time to time, the author is of the strong view that it should take proactive measures to remove ambiguities in the above provisions so that litigations may be reduced and the assesses are also not faced with unnecessary hassles. The department should give reasoned guidelines to decide such issues, otherwise these are subject matter of litigation which shall be decided ultimately by courts.


The views expressed are the personal views of the author only. Therefore, the same should not be considered as final opinion on the subject matter. There may be other views also. So, the readers are advised to consider all the points before relying upon the above write ups.

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May 2022