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Published on:

September 6, 2024

Viraaj Vashishth

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GST on Free Samples and Supplies

In a wide range of sectors, free samples are used by businesses as an efficient marketing technique aimed at winning over customers and enhancing the recognition of the brand. However, the free distribution of goods as a marketing strategy appears rather simplistic when viewed from a ‘pure marketing’ perspective. Still, it is fraught with complex issues in the premises of Goods and Services Tax (GST) in India. This article focuses on the GST law and free samples by presenting the different arguments practically on how GST on free samples is classified, how they are priced and how it affects Input Tax Credit (ITC) within the boundaries of GST regulations.

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Definition and Nature of Free Samples and Supplies

A free sample is a sample of an offered product that is given to existing or potential customers for promotional purposes and is not charged to the customer. Such samples are usually given out to promote the product’s quality, promote the brand, or market a new product. Drug companies often give mahouts and veterinarians free samples of new drugs to promote their products, and in the case of FMCG companies new small packs are given to the customers to persuade them into buying the products. Read how GST impacts the FMCG sector here.

It is necessary to differentiate between “free samples” and ‘gifts’ under the GST law. Both terms include giving away goods at no cost, however, a free sample is regarded as a tool of business promotion and has a business orientation. Gifts are not meant to be used for any direct business consideration. In legal terms though, this is where they need to be understood.

Tax Implications under the Pre-GST Era

In India prior to GST enactment, there were many taxes applicable to businesses to be paid under the value-added tax regime, service tax laws, excise duty regime and others. This complicated tax regime meant that business was subject to a tax-on-tax burden, with cumulative tax burdens. The goal of the GST regime was to consolidate direct taxes, not just indirect taxes, into a single aggregate tax, removing structural inefficiencies and streamlining compliance.

GST Law Provisions Relevant to Free Samples and Supplies

There are defined rules concerning the tax treatment of free samples under the GST system. Some highlights are listed below:

1. Section 7 of the CGST Act

It is the provision which governs the supply of goods and services hence taxable in nature. Supply is all forms of supply of goods or services for a consideration made and/or promised in the course of or in furtherance of business. Certain activities also qualify to be treated as supply even though they lack consideration.

2. Schedule I of the CGST Act

Provides for certain services to be treated as supply even in the absence of consideration, hence affecting the treatment of free samples.

3. Input Tax Credit (ITC) Provisions

Due to Section 17(5) of the CGST Act, it is made very clear that certain goods and services for which ITC is not allowed, and this includes goods and services for personal use and free distribution.

Taxability of Free Samples and Supplies under Goods and Services Tax

It is natural for businesses to ask whether free samples would be subject to GST. Schedule I of the CGST Act contains several activities that are deemed as a supply despite the absence of consideration. This means that there are occasions where taxation even on free samples is applicable because the goods are however supplied free of charge.

Conditions in Which GST is Applicable

1. Free Sample for Promotional Activity: free samples of products issued to prospective customers for business reasons are also governed by the Tax. For instance, Doctor's sample medicines issued by pharmaceutical company peddlers will constitute supply under the purview of GST.

2. Inter-Company Provision of Free Samples: Inter-company provision of Free Samples and Inter-Company provision of Free Samples of related persons even if consideration does not pass between entities distinct from the person e.g.(same bank branch same company) will attract GST.

Conditions in Which GST is Not Applicable

1. Quality Testing and R&D: Any sample by way of FREE SAMPLE given to clientele purely for quality assurance and is therefore not meant for sale or any promotion does not attract GST.

2. Nominal Samples: It is common for very minimal amounts of free sample products for goods, to be exempt from the imposition of GST as long as the transaction does not constitute taxable supply.

Estimation of the Value of Free Samples for GST Payments

As quoted above, after investigating whether GST would also apply for free sampling, the next thing that is worked out is the taxable amount. The GST valuation rules propose different ways of calculating the value of goods in case of no consideration. Generally, the valuation can be done as follows:

1. Open Market Value (OMV): The first method is to simply seek to establish the Open Market Value of the goods. OMV is the price at which the goods are disposed of to customers by their manufacturers in the due course of business.

2. Transaction Value: Where OMV is not possible then, the value could be that of a transaction of unrelated persons.

3. Cost Method: In cases where both OMV and transaction values are ruled out, the value may be computed as the cost of the goods plus 10% of the value.

Here is a simplified table that illustrates the valuation rules for free samples under GST:

Valuation Method	Explanation	Example
Open Market Value	Price at which similar goods are sold.	Goods normally sold at Rs.1,000/unit.
Transaction Value	Value based on an unrelated party transaction.	A similar sale to an unrelated buyer.
Cost Method	Cost of goods plus 10% margin.	Cost Rs.900 + 10% = Rs.990.

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Input Tax Credit (ITC) on Free Samples

The most important consideration that the businesses have is the respective availability of Input Tax Credit ITC with regard to free samples to customers. This case is further supported by Section 17(5) of the CGST which states that input tax is not available with regard to free gifts such as free samples of the goods because these goods are considered as being for domestic consumption or given away free.

Situations Where ITC is Disallowed

‘Promotional freebies’ ‘exception’ where businesses incur cost and later seek the ITC. Free samples/incentives for marketing purposes For Example if a sample is offered free of Big Mag & Dear also made samples which are free so also have ITC. When those goods are free on the other hand when by marketing strategies an effective marketing strategy is adopted than the extending the marketing strategy is offered and hence ITC of those goods purchase will not be reclaimed.

Personal Use

Where such goods are procured with the intention of making samples for some goods but later consumed first ITC with respect to such goods will be reversed.

Exceptions and Clarifications

When talking about how free samples may at certain point be considered in ITC claims, they do accompany strict compliance with the GST law when issuing out or distributing free samples. The businesses will hardly comply with the criteria and hence free samples will be used while seeking tax exemptions duly, which, in most cases, the loan agreed to be forfeited once receiving tax reinstatement.

Free Samples In Commercial Use – Case Study

Free samples are handled in various ways in different industries and in different business scenarios, here are some examples:

Treatment of Free samples in Pharmaceutical Industry

In this sector, free drug samples are often provided to physicians in order to sell new drug products. These transactions are deemed as a deemed supply for GST, and liability to pay GST lies with the company which is providing the samples worth…. In addition, there is normally no ITC for inputs used to manufacture the samples themselves.

Treatment of Free samples in the FMCG Sector

In this line of business, companies will usually offer small packs of products to the consumers in the form of free samples. These transactions are mostly taxable transactions under gst and hence there is no Input tax credit on the goods borrowed for free samples.

How to disclose these supplies in the returns?

To disclose free samples and supplies, you must side them properly into the GSTR-1 form. Free supplies are treated as taxable under gst, hence reporting of free supplies of the arrangement have to be properly included in your outward supplies of the sales even if there are no payments involved. Regarding value it can be required that the value of the goods if not arrears to market value (open). It may be implied that following the said rules be obtained or basis the gst authorities.

In Conclusion

Free samples and supplies are both very crucial and they bear consequences in business that threaten averting tax registration such as GST. It is worth noting that while gst may be invoked in many sections, other conditions on the basis of valuation of a business and claiming itc may hinder many businesses and thus the need for competent taxation officers. Some taxpayers become overly anxious about gst and fail to pay undue taxes; this should not be the case as supporting documents, compliance with gst laws and a few discussions with tax return preparers will put them right above them.

FAQs

1. What is the meaning of GST incurred on free samples?

GST on free samples relates to the tax charged on products offered as free samples for advertising purposes and top management leaving the customs.

2. Is gst applicable on free samples?

Yes, free samples including promotional gifts made without consideration would attract GST if they are properly considered as a supply under the GST act.

3. What is the procedure of GST free sample assessment?

Free Samples may attract GST which For calculation of GST, normal provisions on valuation of goods have stipulated consideration of the Open Market Value (OMV) or transaction value.

4. What are the advantages and disadvantages of GST on free samples for businesses?

No, ITC on free samples under GST is generally disallowed as provided for under Section 17(5) of the CGST Act.

5. In which cases CIT would not be applicable on free samples?

In such cases, tax is probably not charged even when free samples are needed because samples are used for testing or doing clinical studies.

6. How is GST calculated for free samples given to clients?

Such valuation methods for GST on free samples are Open Market Value, transaction value, cost plus 10%, etc.

7. Is it necessary to capture the details of the free samples for GST?

Yes, free samples must be recorded in documents listing out the billed quantity of free samples in the delivery challan. Business practice must be in detail and complied with the GST requirements.

8. Are there any distinctions regarding the free samples in pharmaceuticals and FMCG translations as well as market studies?

Business practice SU while free samples VAT in both industries exist, some rule of thumb or documentation maybe follows.

9. What documents are maintained, and what other compliance is expected on GST on free samples?

Delivery challans must be issued for distribution of goods, records must be maintained, and the usage of free samples should be included in the returns.