GST on Free & Sample Products

In a fast growing, competitive market, one of the most effective ways to gain new customers is to give away free and sample products. Providing free or sample products is a tried and tested marketing method used by various companies in India, and in this article, we review the applicability of GST on free and sample products in detail.

Applicability of GST on Free and Sample Products

A taxable event under GST is a supply of goods or services for which GST is leviable. Section 7 of the GST Act deals with the term supply, and it states: "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." As there is no consideration paid by a person for a free or sample product, it would not be treated as supply under GST. The distribution of goods should also fall under Section 17 (5)(h) of the CGST Act, and thus ITC reverse shall apply for providing free of cost.

S. No.	Condition	Payment of Output Tax	Payment of ITC
1	Goods manufactured for distributing as free samples and then distributed to the respective manufacturers	No output tax payable	Should reverse the ITC
2	Goods manufactured for normal use and then transferred as free samples to the respective manufacturers	No output tax payable	Should reverse the ITC
3	Goods manufactured to be distributed as free samples and then distributed to respective manufacturers	Output tax payable	ITC allowed
4	Free supply of goods to the respective manufacturers without any consideration	No output tax payable	Should reverse the ITC
5	Buy one, get one free product	Output tax applies on transaction value	ITC allowed

Further, Schedule I contains activities to be treated as supply even if made without consideration. The provisions of Schedule I is reproduced hereunder:

Activities Treated as Supply Even If Made Without Consideration

Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Supply of goods -
1. By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
2. By an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
Further, as per Circular No. 92/11/2019 - GST issued by the CBIC released on 07th March 2019, states that any goods or gifts provided under the category of gifts, samples, and other related categories without consideration, it shall not become categorized as 'supply' as per the Act. Hence, the input tax credit shall also not apply to those said goods.

From Schedule I reproduced above, it can be noted that the supply of free samples does not fall under the category of activities to be treated as supply even if made without consideration. Note: Free samples cannot be classified as a business asset where input tax credit has been availed. Hence, the transaction of free or sample products does not qualify as supply. Thus, the taxable event will not arise and hence is not applicable to the same.

Goods Provided as Free

The supply of goods without any consideration shall apply under the category as Free Supplies. The following shall describe the situations of treating such goods as free supplies: Any goods provided to the supplier's related or distinct members shall apply as free supplies. Those goods shall apply as per Para 2 of Schedule I of Section 15 of the CGST Act 2017. Goods supplied to the recipient and if the recipient categorized as an unrelated person but falling under u/s 7(1) of the Act GST shall not apply for the said goods and shall apply as free supplies for the said goods. And thus, as per Section 17(5)(h), the supplier can reverse ITC for the goods delivered. However, for goods given as 'buy one, get offer', shall not apply as free supplies as it is not distributed for free. 'Not as free supplies' as two products are supplied at the price of one. Hence ITC shall apply for the said goods delivered to the customer. In addition, all the goods supplied to the consumer shall apply as transacted with full value.

Goods provided for Free by the Customers

A few situations where customers do provide goods to the manufacturer for their use in production. These goods provided to the manufacturer questioned the category of free supplies. Hence to clarify, the Government of India (GoI) issued clarification through Circular No. 47/21/2018-GST on 08-06-2018 stating the following: Question: The members raised clarification on does goods provided to the manufacturer owned by the Original Equipment Manufactures (OEM) attract GST during the supply of goods, and does reverse ITC apply? Clarification:

For Original Equipment Manufacturer (OEM)

When the owner of the original equipment manufacturer (OEM) provides Moulds and dies to a component manufacturer (provider and the receiver are unrelated persons or distinct persons) shall not apply as supply as per the FOC basis because there is no consideration involved. In addition, as the goods supplied by the Original Equipment Manufacturer follows the FOC basis, the supplier shall not apply for reverse Input Tax Credit.

Value of Supply

The value of the supply provided by the Original Equipment Manufacturer to the manufacturer provides all the goods with no cost and not as 'buy one, get one' free. Hence the transaction value provided to the said goods stands nil. Moreover, as per Section 15(2)(b) of the Central Goods and Services Tax 2017, the Original Equipment Manufacturer provides the goods to the manufacturer in FOC basis, it shall not be treated as a value of supply as the goods were not incurred by the manufacturer.

Reversing the Credit Availed

If the Original Equipment Manufacturer and the component manufacturer made an agreement for developing the product with goods manufactured by both manufacturers but the Original Equipment Manufacturer, adds value to the goods provided, the Original Equipment Manufacturer can reverse the credit availed on such goods provided.

Input Tax Credit for Free and Sample Products

Various clients often ask us, can a person having GST registration avail input tax credit on free and sample products distribute? To arrive at an answer, we must first look at Section 16(1) of the CGST Act.

Section 16 (1) of CGST Act

Every registered person under GST is eligible to avail input tax credit on any supply of goods and services that can be used in the course or furtherance of business. Specific exemptions to the above general principle are provided under section 17 (5) of the CGST Act. Section 17 (5) specifically states in point (h) that goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample is not eligible for the input tax credit. Thus, according to the above provisions of section 17 (5) (h), the input tax credit is not available for the free sample. If input tax credit has been availed than the taxpayer, then the taxpayer must reverse input tax credit pertaining to goods which are to be disposed of by way of free sample.

Conclusion

In the case of free and sample products, GST is not applicable as it doesn't fall under the definition of supply. Also, input tax credit pertaining to goods which have been disposed of by way of free sample is not available under GST.

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