Overview of GST on Goods Given as Gifts or Free Samples

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Organizations have adopted various marketing strategies to boost sales in a consumer-oriented marketplace. To expand their customer base, they distribute goods or services as free samples or gifts. Such samples/ gifts are also known as “Business promotion.”

Further, distributors are often given additional goods free of cost, a sponsored foreign trip, or certain home appliances when they achieve their sales target. Such expenses are incurred to increase the sales of the company. In this article, we discuss GST taxability on gifts and free samples. Also, the availability of ITC in such activities.

What Are The Sections Relating To GST Applicability On Gift/Free Samples
Impact Of GST On Goods Given As Free Samples/Gifts Or Business Promotion
Conclusion
Why Choose Incorp?
FAQs Related To GST On Goods Given As Gifts Or Free Samples

What are the sections relating to GST applicability on gift/free samples?

First, let us take a glance at the related provisions of eligibility of ITC (Input Tax Credit) under the CGST Act on the inputs used by a company:

A. Section 16 of the CGST Act provides that ITC can be availed if the goods/services procured as inputs are used or intended to be used in the course or furtherance of business.

B. Section 17(5)(h) of the CGST Act provides that ITC is ineligible on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

Therefore, a company can claim ITC if it satisfies the conditions specified under section 16 of the CGST Act and does not fall under the list of restricted credit mentioned under section 17(5)(h) of the CGST Act.

Impact of GST on goods given as free samples/gifts or Business Promotion

We have tabulated a chart on the impact of GST on goods given as free samples/gifts or Business Promotion. In the below scenarios, the parties to the transaction are not related persons as defined under the GST Law.

Scenario	Activity	GST Impact
1	Buy “x” Qty get “y” Qty free (Same Product)	This is a common marketing strategy wherein (x+y) quantity is sold for the price of “x” quantity. In this case, GST is payable on the price charged to the customer. Since no other consideration is flowing to the seller, GST is not payable on the notional value of “y” quantity. Input tax credit on inputs/services is available without any restriction. Here we can also have a case of a company offering specific discounts on achieving a particular sales target during a given time.
2	Buy Product “A” and get Product “B” free.	In this case, we have 2 types of promotion schemes:- If Product A and Product B are related and sold together in the normal course of business, it will be a case of composite supply. The seller needs to charge the GST applicable on a dominant product on the transaction value. If Product A and Product B are not related and sold together in the normal course of business, it will be a case of mixed supply. The seller needs to charge the highest rate of GST applicable to Product A or Product B on the transaction value.
3	Free Samples of products manufactured /traded by Company to distributors	Companies distribute free samples of new products to test the market response or promote the sales of their product. The products are given without consideration and qualify as free samples/gifts. In this case the company will not be eligible to claim ITC on account of specific restrictions of ITC as per section 17(5)(h).
4	Gold Coins, Outstation Trips, Home Appliances given to distributors under Incentive schemes	Many times, companies promise freebies such as gold coins, outstation trips, home appliances etc. to promote sales to its distributors/customers who achieve a particular sales target. This is a clear case of goods distributed as gifts without any consideration. ITC is not available to the company on the purchase of such goods. A company need not pay GST on goods distributed as gifts because it doesn’t meet the supply criteria under GST.
5	Distribution of advertisement materials such as stationery items with name of company embossed on it, signage display	It is considered entirely as a business expenditure. It has been incurred to facilitate the business and can’t be termed as a gift. It is an advertisement and the supplier gets material benefits. Essential characters of gifts are missing. Directly or indirectly, suppliers benefit from this and not the recipient. No GST payable on the distribution of such goods. Further, the supplier is eligible for ITC. However, some advance rulings have held otherwise. It was held that ITC is not allowed as it was considered as a gift.
6	Distribution of Catalogue, Brochures, Rate Card to customers	This is not a case of a gift. Catalogue, Brochures, Rate Card etc. are given to customers as a normal business practice to promote the company. There will be no reversal of ITC under this scenario.
7	Goods/ services distributed under CSR Activity	This is an unsettled question whether ITC can be claimed on goods distributed free as a part of CSR activities. We have contradicting advance rulings on the subject where some allow ITC and some disallow ITC. Arguments in favor of allowing ITC of CSR activity is that CSR is obligatory under the Companies’ Act 2013. Further, the CSR activity is regular in nature. This is opposed to a ‘gift’ which is voluntary and occasional in nature. Therefore ITC of goods/services distributed under CSR activity should be eligible. It shall not fall under the purview of section 17(5)(h).
8	Supply of Moulds and Dyes by Principal to Job worker without any consideration	If the contract between the Principal and Job worker is to undertake job work activity using the moulds and dyes belonging to the Principal then the Principal need not pay GST on its supply. Further there is no need to reverse input tax credit by the Principal.
9	Gift by Employer to Employee	Gift given by employer to employee of value not exceeding Rs. 50,000/- per employee in a financial year then ITC to be reversed. In case of value exceeding Rs. 50,000/-, the employer needs to pay output GST on such supplies and as a result he is eligible for ITC of such supplies.
10	Goods supplied free of cost under Warranty	Under replacement warranty, goods are supplied free of charge to customers. No separate consideration is charged at the time of replacement. This is because consideration for the same has been recovered at the time of supply of principal goods. Thus, tax on the same would have been paid at the time of principal supply of goods, as such costs are included in the price of principal goods sold. ITC on input and input services used to provide warranty services is available to the supplier.

Conclusion

The impact of GST on gift items varies based on the specific transactions, on the goods or services that are given free of cost to customers, distributors, employees, job workers, or any third person.

In this regard, businesses must examine the same concerning GST law to avoid future litigation. However, when a given activity qualifies as a free sample / gift, ITC is not eligible to the supplier. Applicability of GST on free samples/gift items will depend on the contractual agreements between the parties involved.

Why Choose Incorp?

At Incorp, our dedicated team of experts shall assist you on various indirect tax levies, including Goods and Services Tax (GST). We can offer you experienced advice relating to nitty-gritty’s of your business; from GST of gifts/free-samples to filing ITC as well as e-invoicing GST, Incorp will be your one stop solution.

Our professionals have in-depth knowledge and wide-ranging experience to help you in the effective planning and structuring of your business to ensure compliance with the GST regulations.