Free Samples & Promotional Items under GST with examples
INPUT TAX CREDIT ON FREE SAMPLES
Section 16(1) of the CGST ACT Provides that every registered person 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 of furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Section 17(5)(h) of the IGST ACT Provides that No input tax credit is available if goods lost, stolen, destroyed , written off or disposed off by way of gift or free sample.
Hence on combined reading of the above, Input tax credit on inputs & services used in free sample should be reversed.
TAXABILITY OF FREE SAMPLES
For the purpose of taxability of free samples we need to examine following aspect:
1. Taxable Person
2. Taxable Event
3. Taxable Rate
4. Taxable Value
1. Taxable Person: Section 2(107) provides that taxable person is a person who is registered or liable to be registered u/s 22 or 24 of the CGST Act.
For the purpose of taxability of free samples, person should be registered.
2. Taxable Event; GST shall be levied on the supplies of Goods & Services. It means Taxable Event will arise when Good & Services are supplied.
It means we need to understand supply. Supply covered under section 7 of the CGST Act that:
Supplies Made for Consideration
Supplies specified in Schedule I or Schedule II
Schedule-I provided that activities to be treated as supply even if made without consideration:
Point No. 1 permanent transfer or disposal of business assets where ITC has been availed on such asset. In our case ITC has not been availed therefore it does not fall into the criteria.
Point No. 2 includes either supplies of Goods or Services between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business without consideration.
Hence Free Samples to unrelated persons are not covered under definition of supply. Criteria of taxable supply are not fulfilled in case of free samples. If supply has not been done, Taxable event will not arise.
3. Taxable Rate: Rate of Tax will be similar if the same product is sold as taxable product.
4. Taxable Value: Valuation Rules provides the mechanism to calculate taxable value if the consideration is not wholly in money. Hence taxable value is out of the following:-
Open Market Value
Sum Total of consideration in money.
Value of goods or services or both of like kind and quality
Value as per rule 4 or 5 of valuation rules.
Thus, Free Samples are not liable to GST as the same are not form a supply.
Free Promotional Item with Taxable Product:
If free promotional item is provided with the taxable product than the consideration for the same will be value charged from the consumer.
For the purpose of input tax credit on the promotional item, there is no restriction in the law. Hence, input tax credit on Promotional item along with taxable product is available.
It is mention in the Q.55 that in case of promotional item given free to end consumer, than tax will be charged on the total consideration charged for such supply.
It can be understand with the following example:
Q.1. Mr. A supplied a mobile phone along with free data card for Rs. 18,000. Cost of the data card is Rs. 1,800.
Price of the mobile phone in open market is Rs. 17,500.
Price of the mobile phone in open market is unknown.
A.1. (i) In first case value of supply will be Rs 18,000.
(ii) In second case Price of the phone will be same as Rs. 18,000.
Q.2. Mr. A Selling a set of Soap which provides offer of Buy 1 Get 1 free. Consideration charged for the soap is Rs. 30. What will be the taxable value?
A.2. In this case taxable value should be Rs. 30 as consideration charged from the consumer.