Taxability and Valuation of free supplies under GST Act

Taxability and Valuation of Free Supplies is subject matter of Dispute. Term “Free Supply” is not defined under GST Act, however in general sense Free Supplies means supply of goods or services or both without any consideration.

A) Free Gifts and Free Samples to Customers

  • Pharmaceutical Companies often provide drug samples to medical practitioners, dealers for free ie without any consideration.
  • As per Section 7 of the said act, Expression Supply includes all forms of Supply of goods or services or both such as Sale, Transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in course or furtherance of business.
  • Hence Goods supplied free of cost shall not be treated as Supply under GST (Except in cases of activities mentioned in Schedule 1 of said act).
  • However as per clause h of subsection 5 of Section 17 of the said act, Input Tax Credit shall not be available in respect of Goods lost, stolen, destroyed, written off or disposed of by way of Gift or Free Samples.
  • Thus it is clarified that Input Tax Credit shall not be available to supplier on the Inputs, Input Services and Capital Goods to the extent they are used in relation to Free Samples or Gifts (Except in cases of activities mentioned in Schedule 1 of said act) ie without any consideration.

B) Gifts to Incentivise Distributors

  • Many companies provide free gifts to its distributors as a marketing strategy. It includes a) Goods which are manufactured by company itself or b) Goods purchased from other vendors.
  • Assuming on procurement of such goods or on manufacturing of such goods company must have availed Input Tax Credit as these are business assets.
  • Hence as per Clause a) of Schedule 1 of said act ie Permanent Transfer or disposal of business assets on which ITC has been availed shall be treated as Deemed Supply under said act even if there is no consideration. Company is not required to reverse credit under Section 17(5)(h) of CGST Act as company have paid GST on Supply of such goods or services.
  • However if company reverses credit under Section 17(5)(h) of said act than company is not required to treat such supply as Deemed Supply under Clause a of Schedule I of said act.

C) Buy one Get One Free

  • Many enterprises announce offers like “Buy 1 Get 1 Free”. It may appear at first glance that in case of such offers, one item is being supplied free of cost ie without any consideration. However it 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 entire supply.
  • Taxability of such supply shall be dependent upon as to whether supply is composite or mixed supply and rate of tax shall be determined as per provisions of Section 8 of said Act.
  • Hence it is clarified that ITC shall be available to the supplier for Inputs, Input Services and Capital Goods used in relation to supply of such goods or services.

D) Discounts including “Buy More, Save More Offers”

  • Supplier (Eg : Shopping) offers various discount to its customers to increase their sales and to attract more customers. Eg: Get 15% Discount on purchases above Rs 10,000/-
  • Such Discounts are shown in Invoice itself as reduction from value before charging GST.
  • It is clarified here that such discounts shall be excluded to determine Value of Supply provided they satisfy parameters laid down in Section 15 of said act.
  • It is further clarified that supplier shall be entitled to avail ITC for such inputs, input services and capital goods used in relation to supply of such goods or services or both.

E) Post Supply Discounts offered as per terms of Agreement

  • Supplier sometimes offer periodic or year ending discounts to their stockists, etc. Eg. Get additional discount of 5% if you purchase 1000 pieces in a year or get additional discount of 10% if you purchase 1500 pieces in a year.
  • Such discounts are established in terms of an agreement entered into at or before the time of supply even though it is not shown on the invoice. Actual quantum of such discounts are determined after the supply has been effected and generally at the end of the year.
  • Such discounts are known as “Volume Discounts”
  • Supplier pass such discount through issue of Credit Notes.
  • It is clarified here that such discounts shall be excluded to determine Value of Supply provided they satisfy parameters laid down in Section 15 of said act.
  • It is further clarified that supplier shall be entitled to avail ITC for such inputs, input services and capital goods used in relation to supply of such goods or services or both.

F) Secondary Discounts

  • Some Suppliers offer discounts after supply is already over. Such discounts are not known at time of Supply.
  • Eg: Mr P supply 1,000 packets of Maggie Noodles to Mr B for Rs 25 per packet. Later Mr A revalues it to Rs 20 per packet and issue a financial credit note to Mr B for Rs 5 per packet.
  • Representation have been received from various trades and industries whether credit notes under Sub Section 1 of Section 34 of said act can be issued in such cases?
  • It is clarified that Financial / Commercial Credit Notes (ie without having impact of GST) can be issued by the supplier.
  • Value of Supply shall not be reduced by Secondary discounts as such discount is not known at Time of Supply
  • There is no impact of reversal or availability of ITC in hands of supplier or receiver.

G) Distribution of Free Samples through Branches

  • There can be a scenario where company distributes free samples through its branches. In such case transfer of free samples to its own branch being related person shall be liable to pay GST (Concept of Distinct Person). Also branch shall be eligible for GST Set Off. Later if branch distribute such free samples to customers that branch shall be required to reverse the credit so availed as per Section 17(5)(h) of such act.
  • Example: Co A (Maharashtra) supplied 100 quantity of samples to its branch in Delhi State. Cost of such free samples was Rs 60 + Rs 3 per sample. However applying provisions of Rule 4 or Rule 5 of IGST Act., Co. A transferred the goods to its branch at Open Market Value ie Rs. 100 + Rs. 5 per sample.

Co. A (Maharashtra) paid GST on such supply. And Branch (Delhi) availed Input Tax Credit for receipt of goods.

Later Branch (Delhi) gave free samples to its customers without any consideration. Here Branch (Delhi) shall be required to reverse credit under Section 17(5)(h) of CGST Act or if company does not want to reverse the credit than such free supplies shall be considered as Deemed supply as per Clause a) of Schedule I of said act and branch shall be liable to pay GST on such free supplies.