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TREATMENT OF FREE SAMPLES UNDER GST

Friday, September 8

There has been a lot of confusion regarding the taxability of goods distributed as free samples under GST. Section 7 of the CGST Act defines the term ‘supply’ and activities made without consideration shall be treated as supply if covered under Schedule 1. The scope of schedule 1 (Activities to be treated as supply even if made without consideration) is restricted to import of services from a related or distinct person, permanent disposal of business assets and supply of goods from principal to agent, agent to principal, between related or distinct persons as specified in Section 25, when made in the course or furtherance of business. This clearly reflects that distribution of free samples by business to its customers (unrelated entities) will not fall under the ambit of Schedule 1 and thus will not get covered under definition of supply. If supply has not been done, taxable event will not arise. Further as per section 17 of the CGST Act, input tax credit shall not be allowed for goods lost, stolen, destroyed, written off or disposed off by way of gift or free samples. Accordingly, ITC is required to be reversed pertaining to goods which have been disposed of by way of free samples. The government has also clarified on various instances that the ITC availed on the free samples has to be reversed in view of the provisions under Section 17(5)(h) of the CGST Act, 2017 and hence no tax is payable on the clearances of samples distributes free of cost as the value of supply is zero and no credit has been availed.

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