Understanding GST on Complimentary Samples and Free Goods
This article clarifies the Goods and Services Tax (GST) implications for businesses distributing complimentary samples and free supplies in India. It differentiates between samples and bundled free offers, exploring their tax treatment both before and after GST implementation. The discussion covers situations where GST is applicable even without monetary consideration and details the rules for claiming or reversing input tax credit on such provisions, alongside disclosure requirements for GST returns.
Understanding GST on Complimentary Samples and Free Goods
Generally, the Goods and Services Tax (GST) applies to the exchange of goods or services for payment. However, businesses sometimes incur GST liabilities even when providing assets at no cost. This article examines the GST ramifications for various types of free offerings made to current or prospective customers. It also discusses the appropriate handling of input tax credit for products provided free of charge. The analysis differentiates between 'samples' and 'buy one get one free' type promotions.
Defining Free Samples and Free Supplies
Samples are products given to consumers for trial before a potential purchase. This is a common direct marketing technique used by Fast-Moving Consumer Goods (FMCG) companies to introduce new items. For instance, newly developed cookies might be distributed to moviegoers without any obligation for them to buy.
Conversely, free supplies involve offering additional products when a customer purchases a primary item, such as receiving one soap free with the purchase of three soaps, or one garment free with three garments. In these scenarios, the complementary product is contingent upon buying the initial item.
Pre-GST Tax Implications
Before the introduction of GST, two distinct taxes were applicable to products:
- Excise Duty: Imposed on manufacturing activities, regardless of whether the goods were sold.
- VAT / CST: Applied to sales transactions. A 'sale' was defined as transferring goods for consideration. Transfers without consideration were not considered sales and thus exempt from VAT / CST.
Tax Treatment Before GST
The tax implications under these earlier statutes are summarized below.
| Issuance of | Excise | VAT |
|---|---|---|
| Free Samples | Excise was applicable as samples were manufactured. | VAT was not applicable since samples were not sold. |
| Free Supplies | Excise was applicable as free supplies were manufactured. | VAT applied to the charged consideration; no separate VAT was levied on the free supply. |
GST Implications for Free Issues
Under GST, a transaction typically involves the supply of goods or services for consideration. Consideration denotes the monetary sum a buyer pays to a seller. Nevertheless, Schedule I of the CGST Act, 2017, mandates GST payment on specific transactions even when no consideration is involved.
One such scenario is the "Transfer / Disposal of Asset on which credit has been availed." Consequently, if a transaction falls under this provision, GST becomes payable even if the supply is gratuitous.
Is GST Applicable to Free Samples/Supplies?
Free Samples
Samples can be categorized into two types:
- Type 1: Products explicitly marked as samples, such as "Physicians Samples NOT FOR SALE" by pharmaceutical companies.
- Type 2: Regular products with a Maximum Retail Price (MRP) that are not marked "NOT FOR SALE" but are distributed as samples.
For both categories, suppliers are generally required to reverse input tax credit (ITC) due to specific restrictions on credit availability for free samples. However, Type 2 samples, being business assets on which ITC was initially claimed, might be considered a 'supply' under Schedule I and thus liable for GST (instead of just ITC reversal). In such cases, GST would be calculated based on the sale value of an equivalent product.
Free Supplies
These supplies also fall into two main categories:
- Type A: Schemes where a buyer receives one or more units of a product free upon purchasing a certain number of the same product (e.g., "Buy 1 Get 2," "1+1 Scheme," "Buy 4 for the Price of 3").
- Type B: Products where additional quantity is explicitly stated on the packaging as being offered for free.
Both are essentially marketing tactics where the seller effectively charges a single price for multiple units or offers more quantity within the same package at a slightly reduced price point. By taxing this single price, GST is effectively paid on the entire bundle, including the supposedly "free" component. It is important to note that customers cannot claim the free product in a "3+1" scheme without purchasing the other three items. Therefore, schemes like "3+1" or "1+1" (or extra quantity offers) are generally taxed based on the combined price paid by the buyer.
However, some FMCG and pharmaceutical companies have received notices demanding GST payment on Type A free supplies, arguing these fall under Schedule I. Recent reports indicate that the Law Commission has advised the GST Council against levying tax on such free supplies and recommended against mandating input tax credit reversals. Due to this ongoing confusion, many companies have replaced quantity discounts with value discounts during invoicing, a change not always welcomed by their marketing teams.
Alternatively, for Type 1 transactions, the free unit and chargeable units can be bundled as a single product with a unified MRP, and GST then applied to this combined MRP.
Input Tax Credit Availment
The eligibility for input tax credit (ITC) largely depends on the taxability of the outward supply of such free samples or free supplies. The summary below outlines the treatment.
| Transaction | Outward Supply | Credit Availment |
|---|---|---|
| Samples - Marked "Physicians Sample" or "Not for sale" | No output tax is required. | Credit must be reversed on the cost. |
| Samples - Drawn from finished goods and offered as samples | Output tax is payable on the sale price (under Schedule I – Permanent Transfer of Business Assets on which credit has been availed). | Credit is available. |
| Free Supplies - Extra units of the product offered | Tax treatment is unclear. Generally, output tax is payable on the sale price (under Schedule I – Permanent Transfer of Business Assets on which credit has been availed), unless billing or packaging changes. | Credit is available. |
| Free Supplies - Extra quantity offered in the same unit package | No distinct treatment; tax discharge on the unit sale itself is sufficient. | Credit is available. |
Disclosure of These Supplies in GST Returns
- Type 1 Free Samples: Since these are not considered supplies, they do not need to be reported as outward supplies in GST returns. The related ITC can be declared in Table 4 of Form GSTR 3B as ineligible ITC under Section 17(5) or as a credit reversal under "Others" if the credit was already claimed.
- Type 2 Free Samples: These are treated as outward supplies and must be reported as taxable outward supplies in Table 4 of Form GSTR 3B as Business-to-Consumer (B2C) sales.
- Free Supplies: These do not typically necessitate ITC reversal or additional supply declarations. Thus, they usually do not require specific disclosure in returns. If output tax is chosen to be paid on them, then a B2C invoice should be issued, and the supply disclosed accordingly in Form GSTR 3B and Form GSTR 1.