Treatment of Free supply under GST Provisions
Free supply of goods or services by any supplier is a legitimate business strategy. New products cannot be introduced in the market without cajoling consumers to try the new product. In pharma sectors free samples of medicines are distributed. In consumer goods sector, free supply along with some other item is a norm. This article analyses GST provisions in respect to free supply done by the supplier of goods or services under GST provisions.
GST Liability on free supply:
The first question which arises as to whether GST is payable on free supply of goods or services or both. The charging section, Section 9 of the CGST Act imposes a tax on supply. Supply has been defined in Section 7 of the CGST Act as ‘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’. A supply is a supply within the meaning of section 7 of the CGST Act only when ‘it is made for a consideration’. If some activity is being done, without a consideration, it is not a supply within the meaning of section 7 of the CGST Act, and hence no tax is attracted under section 9 of the CGST Act. Thus, no GST is payable on free supplies of goods or services or both.
ITC Reversal on Free supplies:
The second question which arises as to whether ITC is required to be reversed if certain free supplies of goods or services or both are being made. Before analyzing the question, it must be understood that charging section and section related to ITC credit are independent of each other, and one must not be used to curtail the ambit of other. Both the provisions play in their own ambit.
Section 16 of the CGST Act provides that every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. A person is entitled for credit if the inputs or input services supplied is used ‘in course or in furtherance of business’.
Thus, there is no requirement in law that inputs of inputs services must be used for making taxable supplies only, mere use in course or furtherance of business is enough. In view of this a person is entitled to avail ITC on all supplies, which are being used in making free supplies, as such free supplies are being made in course or in furtherance of business.
Section 17 provides for apportionment of credit based on the fact whether the supply is being used for business or for other purposes. When free supplies are made to promote a product, or as marketing or sales effort, such use is for business only, and no reversal is required under Section 17(1) of the CGST Act. Section 17(2) provides for reversal of credit if it is used partly in making taxable supplies, and partly in making non-taxable supplies. We have seen earlier that free supply is not a supply within the meaning of section 7 of the Act, there is no question of it being an exempt supply. Thus, no reversal is required under section 17(2) of the CGST Act.
Free supply of goods or services or both are business activity not amounting to supply, just like other numerous business activities where inputs or input services are used by a supplier. The inputs or input services can be used for testing, trial, sampling, market research etc. from which no revenue comes to a supplier. Merely because no revenue is coming from free supply of goods or services or both cannot be a reason for demanding the reversal of ITC credit. Use of inputs or inputs services in making free supplies of goods or services is a genuine marketing activity, and the supplier must be entitled to take credit for such use of inputs or inputs services. In view of these this author is of the view that no reversal of credit is required for inputs/input services used in making free supplies.
Further, no supplier distributes anything for free. The cost of everything distributed free is already built in price of taxable supplies, on which tax is being paid by the supplier. In view of these, this author is of the view that no input tax credit reversal is required on inputs/input services used in making free supplies.