Applicability of GST on Free Sample Supplies
A taxable event under GST is supply of goods or services for which GST is leviable. Section 7 of GST Act deals with the term supply and the 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.
Further, Schedule I of CGST Act 2017 contains activities to be treated as supply even if made without consideration. The provisions of schedule I are 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 –
- By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
- 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.
As per Schedule I of CGST Act 2017 , it can be noted that supply of free sample does not fall under the category of activities to be treated as supply even if made without consideration.
Note: Free sample cannot be classified as business asset where input tax credit has been availed.
Hence, the transaction of free or sample products does not quality as supply. Thus, taxable event will not arise and hence is not applicable on the same.
Input Tax Credit for Free and Sample Products
Can a person having GST registration avail input tax credit on free and sample products distributed?
To arrive at an answer, we must first look at 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 is provided under section 17 (5) of CGST Act.
section 17 (5) of CGST Act 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 input tax credit.
Comment : As per section 17 (5) of CGST Act , input tax credit is not available for 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.
In 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 has been disposed of by way of free sample is not available under GST.