GST on Free Samples, Supplies and Buy One Get One Free Offers

Festival season is around the corner, sales promotional offers will be a common sight in the market place. More often, promotional schemes are used as effective sales strategy to attract the customer to buy their product.  Among the various promotional offers, Buy One-Get One Free, Free gifts, Flat discounts, and so on, are the popular schemes. In case of newer products, in order to gain market penetration, the concept of free samples are adopted. Under this, products are supplied for free as a sample, and this is very common in the pharmaceutical industry. While this method of sales is proven to be successful, it is not as easy for businesses as it looks. In deciding the promotional offers, the businesses need  to consider the implication of taxes on these schemes.

In our earlier blog How to Calculate the Value on which GST should be charged?, we discussed about the treatment of discounts under GST. In this blog, let us discuss on the implication of tax on free supplies and free samples in the erstwhile regime, and under GST.

In the former regime of indirect taxes, VAT was not levied on free supplies and free samples since VAT was applicable on sale having consideration. However, in most of the states, the input tax credit on purchase was not allowed, and it had to be reversed. In case of Central Excise, excise duty was levied even on free supplies. This is because, taxable event under Central Excise was removal of goods.

GST on free samples, buy one get one free, free supplies

The treatment of tax for free samples and supplies under GST  is more or less similar to VAT regime. Under GST, anything supplied as ’Free’, tax will not be levied on such supplies. However, on doing so, businesses need to sacrifice the benefit of input tax credit. This means, businesses will not be entitled for input tax credit on the goods, which are supplied as ’Free,’ and proportionate ITC needs to be reversed.

Let us understand GST on free supplies with an example

Electronic World is an exclusive showroom of electronic products. They purchase 49 Inch and 22 Inch LED TV from their distributor. The following are the details of inward supplies:

TV QTY Rate Amount GST
49 Inch LED TV 10 Nos 50,000 5,00,000 1,40,000
22 Inch LED TV 10 Nos 10,000 1,00,000 28,000

Electronic world announce festival offers. One such offer is, Buy 49 Inch LED TV and GET 22 Inch LED TV Free. Now, how will the free supplies be treated in GST?

As discussed earlier, on free supplies, GST will not be levied. As a result, on making outward supplies of 22 Inch Led TV as free, GST will not be charged. However, Electronic World needs to reverse the ITC claim of Rs 2,800 on the inward supply of 22 Inch Led TV.

Similar treatment needs to be done in the event of goods are stolen, destroyed, written-off or disposed of as gifts,

Conclusion

The GST era has not brought in any significant change in the behaviour of free supplies. The provisions of the erstwhile law of VAT is replicated.  However, caution should be taken to ensure that the reversal of ITC are accounted for periodically as applicable. This is to avoid interest or penalty in case of detection of non-adherence by the tax authority.

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Pugal T & Yarab A

3 Comments

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  • Dear Team,

    Greetings for the Day..!!

    Kindly guide us on applicability of Tax Rate on the below transaction

    Seller is in the state of Telangana, selling goods over the counter, Buyer (ultimate consumer from a state of Karnataka) buys material over the counter.

    Is the seller liable to charge IGST considering the buyers place, or he need to charge SGST and CGST considering the place of supply as Telangana, irrespective of the buyer address.

  • Determination of the free sample value is critical for reversal of input credit. General practice (considering the VAT) is to reverse the input credit availed on the materials only. However under GST the reversal of input credit should be on cost of sales and not on cost of manufacture. Best option is to pay the tax based on the value considered for normal sales value of the product.

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