There has been a lot of confusion regarding the taxability of goods distributed as free samples/Gifts under GST Act. Section 7 of the CGST Act defines the term ‘Supply’ and it stipulates that the activities made/done 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/Gifts given 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. Consequently, since the 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 many times 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.
Hence, no tax is payable on the clearances of samples distributed free of cost as the value of supply is zero. Further, input tax credit (ITC) shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration.
Buy one get one free offer:
This is an another form of discount provided by the Company to it’s Consumer like “buy one soap and get one soap free”. This is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply.
Taxability of such supply will be dependent upon as to whether the supply is a Composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act. It is also important to note that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.