Free samples and promotional items in GST

Free samples and promotional items in GST

Free samples and promotional items in GST, what will be there treatment in GST? It is a big question at this point of time what will happen to the free samples in GST. Although this issue is not new and in earstwhile excise also there were cluttered provisions and court precedents for taxation of free samples and promotional items.

In GST there are two basic provisions which provide for the free outward supply of goods. Here it is very important to note that both section 17(5)(h) and Para no. 1 of schedule I provide for free supply of goods only.In Ponit no. 1 of schedule I term business assets is used. This term is not defined in Act. But we can say that we cant have inventory of services so they are not covered in para no. 1.

Now let us have a look on the language given in the Act itself.

Section 17(5)(h) (Only relevant portion is reproduced here)

“Section 17(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection
(1) of section 18, input tax credit shall not be available in respect of the following, namely:—

 (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”

Para no.1 to schedule I: 

“Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.” (Reproduced from CGST Act)

Practical scenarios with examples:

Now let us analyse both of these provisions one by one. Section 17(5)(h) speaks about the reversal of credit whereas Para 1 of schedule II talks about the supply.In light of actual business scenarios how these provisions will be applicable.

Case I : When free item is given with a particular number or quantity of items.

Example: A horlicks of 100 Grams free with purchase of a horlicks of 1Kg. In this case whether the pouch of 100 g shall be construed as a gift or free sample. Gift word is not defined in any of GST Act. But in common parlance we an say it is something given without any price charged for it. In our case a company instead of selling 1100 gm for a price it is breaking it into two parts. 1 kg have the price and 100 gm pouch is given on the condition that you buy the 1 kg pack first.

In these kind of schemes the price charged for 1kg or (item having price) includes the price for the free item also. If you wont make payment for 1 kg you wont get the 100 gm. We can conclude that it shall not be a gift and there is no need to reverse the credit on these kind of scheme.

How to show free items in invoice:

Now a question will arise then how we will show the free item in invoice. Because if we will show the entire amount for the main product having a price and zero for the free item there may be issues from authorities. For that matter it is advisable to allocate the price to the entire deal and not only to the item having a price. When customer will get the free item they wont bother if it is included in the total supply in invoice. But this reflection in invoice will make you safe in future litigation if any.

Case II: Promotional items given free of cost:

Examples: Let us take an example from pharma. Free samples given to the doctors for promotion. 

In this case there is no price for the entire supply. As free promotional item is given without any price. In this particular case the credit shall be reversed because the entire transaction is free of cost. Although company may get order in bulk in future but that cant be directly related to this transaction. There can be another views also. In some court precedents it was also held that the price for free samples is also added to the cost of entire product. But in GST law it is clearly given that when something is given as free sample then its credit will be disallowed. In my opinion in case free samples the credit shall be reversed.Although based on specific case the stand may change. 

Please post your queries or any counter argument in comments.