Last updated: January 24th, 2020 6:38 PM

GST on Free of Cost Supplies

Many customers at times express distress with the free of cost supplies offered with the product or services. Such free of cost supplies are being offered, generally, to attract more and more customers. Such free of cost supplies are offered, generally, to attract more and more customers. To encourage more sales, for example, the customer receiving free supply of goods worth Rs.100 on purchase of goods worth Rs.1000. Apart from customer satisfaction from the vendors perspective, understanding and complying Goods and Service Tax (GST) provisions for the free of cost supplies are also essential. The present article tries to explain the GST provisions attached to the Free of Cost (FoC) supplies.

Taxability of Free of Cost Supplies under GST

GST shall treat ‘Supply’ as a taxable event. Meaning that GST is applicable or payable only in the case of ‘supply’ of goods and/or services. As per Section 7 of CGST Act 2017, the term supply shall cover all the forms of supply of goods or services when done for a consideration. Then one could question about the supply of goods or services provided without consideration. For getting the answer, one shall reason through the sub-section provided to Section 7. Going through sub-section to Section 7, one can settle that supply without consideration shall apply through sub-section (c) of Section 7. Sub-section (c) covers the activities which are to be treated as supply even when made without consideration as per Schedule I. Thus, from the above paras, it can be concluded that the free of cost supplies does not cover within the definition of term supply. However, free of cost supplies covered as per Schedule I qualifies as ‘supply’ under GST.  Para I of Schedule I states transferring or disposing of business assets permanently and availing input tax credit (ITC) availed on such assets would be treated as supply. It shall apply even when such assets are transferred without consideration. Thus, other than such qualifying assets, any other free of cost supply shall not qualify as ‘supply’ under GST.

Clarification Issued by the Board

The Central Board of Indirect Taxes and Customs (CBDT) clarified various points about free of cost supplies through circular no. 92/11/2019-GST dated 7th March 2019. The explanation of the circular are as follows:

Supply

The board clarified that the term ‘supply’ covers the supply of all the goods and services performed for consideration. Hence, in the case for free of cost supplies of goods and services, it doesn’t qualify as ‘supply’ under GST. Apart from in case of activities covered as per Schedule I.

Input Tax Credit

The board clarified that the supplier cannot avail input tax credit of inputs; input services or capital goods used in relation to supplies made without consideration, i.e. free of cost supplies. The supplier would be eligible only to avail the input tax credit in respect of the supply covered as per Schedule I. Scroll down for more information on the Circular [pdf-embedder url="https://www.indiafilings.com/learn/wp-content/uploads/2019/12/1-1.pdf" title="CBDT- circular no. 92/11/2019"]