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?
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.
Related Read: An Overview on Composition Scheme under GST
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.
|1||Buy “x” Qty get “y” Qty free (Same Product)||
|2||Buy Product “A” and get Product “B” free.||In this case, we have 2 types of promotion schemes:-
|3||Free Samples of products manufactured /traded by Company to distributors||
|4||Gold Coins, Outstation Trips, Home Appliances given to distributors under Incentive schemes||
|5||Distribution of advertisement materials such as stationery items with name of company embossed on it, signage display||
|6||Distribution of Catalogue, Brochures, Rate Card to customers||
|7||Goods/ services distributed under CSR Activity||
|8||Supply of Moulds and Dyes by Principal to Job worker without any consideration||
|9||Gift by Employer to Employee||
|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.|
Related Read: What Happens When GST Return Is Not Filed?
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.