In this era of cut-throat competition, businesses are trying all possible techniques to attract customers. One of the most common approaches here is to distribute free samples and gifts. However, the question that arises is, how are these samples and gifts taxed? GST is levied when there is supply. But when there is no direct revenue inflow, how can such goods be taxed? In this article, we will briefly discuss the aspects of taxability, valuation and availability of ITC on such supplies from the supplier’s point of view. In this article, we’ll discuss GST on free samples, the free samples under GST, GST invoice for free samples, discounts under GST.
There are several promotional schemes which are offered by businesses, to increase sales volume and to attract new customers for their products. To ensure uniformity in the implementation of the law across the field formations, the Central Board of Indirect Taxes and Customs (CBIC) has clarified the following points under GST on sample goods.
- Many taxpayers often provide samples to stakeholders (stockist, dealers, customers, etc.) without charging any consideration. As per the GST Act, the definition of ‘supply’ includes ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business’.
- From the definition, it can be inferred that goods or services that are supplied free of cost (without any consideration) can not be treated as ‘supply’ under GST (except activities mentioned in Schedule I of the act). Based on this interpretation, we can say that samples which are supplied free of cost, without any consideration, do not qualify as ‘supply’ under GST (subject to exceptions).
- Further, under section 17(5)(h), it is explicitly stated that Input Tax Credit (ITC) will not be available for goods lost, stolen, destroyed, written off or distributed as gifts or free samples.
Note: If the activity of distribution of gifts or free samples falls within the scope of ‘supply’ on account of the provisions mentioned in Schedule I of the GST Act, the supplier can claim the related ITC after generating GST invoice for free sample.
- ‘Buy one soap, get one free!’. We have seen several advertisements like this. On first glance, it may appear that one item is being supplied free of cost (without any consideration). The definition of supply excludes activities that do not have an element of consideration attached to it.
- However, in this kind of offer, we need to understand that, this is not an individual supply of free goods but, this is a case where two or more individual supplies are clubbed, and a single price is charged for the entire supply. In other words, this can be treated as ‘supplying two goods for the price of one’.
- Thus, based on the points mentioned above, we can say that GST is applicable when multiple supplies are clubbed together for a single price. However, the rate of tax will depend on the type of supply (mixed supply or composite supply).
- The CBIC has clarified that ITC on inputs, input services and capital goods used for supplying such goods or services or both will be available to the supplier in invoice for free sample under GST.
- At times, suppliers offer volume/staggered discounts to their customers (increase in discount rate with an increase in purchase volume). Generally, such discounts are shown on the face of the invoice itself or are established in the terms of an agreement, entered into at/before the time of supply.
- The CBIC has clarified that such discounts offered by the suppliers to customers should be excluded while determining the value of supply (provided other parameters are satisfied).
- The recipient of the supply should reverse the ITC attributable to the discount based on the document/(s) issued by the supplier.
- ITC on inputs, input services and capital goods used for supplying such goods or services or both (discounted supplies) will be available to the supplier.
- The CBIC has clarified that secondary discounts should not be excluded while determining the value of supply. In other words, the value of supply should not include such discounts.
- There is no impact on the availability or non-availability of ITC (in the hands of the supplier) in this case.