Supply done Free of Cost in Goods and Service Tax (GST)
Free of cost dilemma solved: We all love free stuff. I mean who doesn’t want. For instance,
- a shoe at Rs.250, or
- selling a shoe of worth Rs.500 at 50% discount i.e. at Rs.250.
Most of the People will buy the (2). But the question arises at what we have to pay GST at Rs. 500 or at Rs. 250
The Promotional schemes are employed as an effective sales strategy to attract the customer for buying their products. Also used for the purpose of testing, sampling, market research, trial etc. from which there is no generation of revenue for the supplier.
Some of the most common examples of sales promotions are:
- Flash Sales
- Buy One, Get One Fee
- Free Gifts
- Flat Discounts
- Free Samples
- Volume Discounts
Section 17(5) of the CGST Act, 2017 limits the input credit on goods which are issued as free samples. It is clear that when the credit availed goods are offered as free samples, the credit relating such goods would not be allowed.
However, there is a doubt that arises is whether the restriction is valid on the free sample of finished products which are manufactured out of input tax credit availed inputs too?
Many were in doubt on the issues raised with respect to tax treatment of sales promotion schemes under GST. To ensure uniformity in the implementation of the law across the field formations, the Government issued to clarify tax treatment of promotional schemes Circular No. 92/11/2019-GST.
The circular No. 92/11/2019 says, it has been noticed that there are several promotional schemes which are offered by taxable persons to increase sales volume and to attract new customers for their products.
Some of these schemes have been examined and clarification on the aspects of taxability, valuation, availability of Input Tax Credit (ITC) in the hands of the supplier in relation to the said schemes are detailed here under
1. Free samples and gifts:
It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. As per section 7(1)(a) of the CGST Act, the expression “supply” includes
all forms of supply of goods or services or both such as
- or disposal
made or agreed to be made for a consideration by a person in the course or furtherance of business.
Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as “supply‟ under GST (except in case of activities mentioned in Schedule I of the said Act).
Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as “supply‟ under GST, except where the activity falls within the ambit of Schedule I of the said Act.
Further, section 17(5)(h) of the said Act provides that ITC shall not be available in respect of goods
- 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 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.
However, where the activity of distribution of gifts or free samples falls within the scope of “supply‟ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.
2. Buy one get one free offer:
Sometimes, companies announce offers like “Buy One, Get One free‟. For example,
- “buy one soap and get one soap free‟ or
- “Get one tooth brush free along with the purchase of tooth paste‟.
As per section 7(1)(a) of the said Act, the goods or services which are supplied free of cost (without any consideration) shall not be treated as “supply‟ under GST (except in case of activities mentioned in Schedule I of the said Act).
It may appear at first glance that in case of offers like “Buy One, Get One Free‟, one item is being “supplied free of cost‟ without any consideration. In fact, 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 the entire supply. It can at best be treated as supplying two goods for the price of one. 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 clarified 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.
3. Discounts including ‘Buy more, save more’ offers:
Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume).
- Get 10 % discount for purchases above Rs. 5000/-,
- 20% discount for purchases above Rs. 10,000/- and
- 30% discount for purchases above Rs. 20,000/-.
Such discounts are shown on the invoice itself. Some suppliers also offer periodic / year ending discounts to their stockists, etc.
- Get additional discount of 1% if you purchase 10000 pieces in a year,
- get additional discount of 2% if you purchase 15000 pieces in a year.
Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end. In commercial parlance, such discounts are colloquially referred to as “volume discounts”. Such discounts are passed on by the supplier through credit notes.
It is clarified that discounts offered by the suppliers to customers (including staggered discount under “Buy more, save more‟ scheme and post supply / volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in section 15(3) of the said Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document (s) issued by the supplier.
It is further clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.
4. Secondary Discounts
These are the discounts which are not known at the time of supply or are offered after the supply is already over. For example,
- M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet. Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/- per packet.
The provisions of section 34(1) of the said Act provides as under:
- “Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or
- where the goods supplied are returned by the recipient, or
- where goods or services or both supplied are found to be deficient,
the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”
Representations have been received from the trade and industry that whether credit notes(s) under section 34(1) of the said Act can be issued in such cases even if the conditions laid down in section 15(3)(b) of the said Act are not satisfied.
It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in section 15(3)(b) of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.
It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in section 15(3)(b)of the said Act are not satisfied.
In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above or by any other means, except in cases where the provisions contained in section 15(3)(b) of the said Act are satisfied.
There is no impact on availability of ITC in the hands of supplier in this case.
Our views on what the circular says is that free of cost of supply of goods or services or both are business activities which do not amount to supply, similar to other several business activities where the inputs or input services are used up by the supplier. It has cleared most of the doubts with respect to the taxability of free of cost of supplies and it could be safely established that the free samples supplied for the purpose of advertisement or such other purposes would not attract GST.
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