1. What are Free Samples and Free Supplies?
Samples refers to product given to consumers to try before purchasing. This method is commonly used as direct marketing strategy by FMCG Companies to market new products. Eg. Newly introduced cookies handed over to moviegoers. These are made available to the customers free of charge and without any obligation on the customer to buy the products.
In contrast, Free Supplies refer to offering additiona
2. Tax Implications under the Pre-GST Era
l products to consumers like 1 Soap free on purchase of 3 Soaps, 1 Garment free on purchase of 3 Garments etc. In this case, the additional product is offered free only when the customer purchases the base product (in above case, 3 Soaps or 3 Garments).
Two taxes were applicable on products under the Pre GST Era
- Excise – which was applicable on activity of manufacture irrespective of whether the goods were sold or not
- VAT / CST – which was applicable on the activity of sale. Sale meant transfer of title in goods by one person to another for consideration. A transfer of title in goods without consideration was not considered as sale and hence did not attract VAT / CST
Tax implications under both these taxing statutes have been tabulated below
|Free Samples||Samples are manufactured and excise was applicable on the same||Samples are not sold and hence VAT not applicable|
|Free Supplies||Free supplies are manufactured and excise was applicable on the same||VAT was applicable on consideration charged. Free supply had Zero consideration and hence no separate VAT was charged on the same|
3. Why is free “issue” an “issue” in GST?
Generally, GST is applicable when transaction involves supply of goods / services for a consideration. Consideration here refers to the monetary sum a buyer is required to pay to the seller.
However, Schedule I of the CGST Act, 2017 provides for payment of GST on certain transactions even when such a transaction is executed without ‘consideration’ (ie buyer does not pay anything to the seller). One of such transaction is “Transfer / Disposal of Asset on which credit has been availed”. Hence, if any transaction gets covered under this entry, GST will be payable even when the supply is made without consideration.
4. Is GST payable on “free” samples / supplies?
- Free Samples – Samples can be bifurcated into two categories
- Type 1 – Marked as samples. Eg. Pharmaceutical Companies mark certain products as Physicians Samples NOT FOR SALE
- Type 2 – Regular Products which carry MRP and do not carry any declaration that the products are NOT FOR SALE but are issued as samples
In both the categories, the supplier is required to reverse the credit due to specific restriction of credit availment on products issued as free samples. However, wrt Type 2, since these are not marked as samples but are business assets on which credit was availed at the time of purchase, there is a possibility of these Type 2 samples being treated as Supply under Schedule I and consequently liable to GST (instead of credit reversal). GST will have to be paid based on the sale value of the “same product”.
- Free Supplies – Such supplies can also be bifurcated into two categories
- Type A – Supplies where buyer gets unit(s) of a product free of cost on purchase of certain units of same product. Eg Buy 1 Get 2, 1+1 Scheme, Buy 4 for the price of 3.
- Type B – Certain Extra Quantity is mentioned on the package as being offered for free.
Both the transactions are merely a marketing strategy and the seller is effectively offering single price for Sale of 4 units of a product at price of 3 or offering more quantity in the same unit container but for the price of a little lesser quantity. By levying tax on such single price, GST is being charged even on the product / quantity which is said to be offered for free. It would be relevant to note that in the above example of 3+1, no buyer can ask for 1 free product without buying the other three products. Hence, 3+1 or for that matter 1+1 scheme or extra quantity offered free supplies will attract tax only on such single price charged to the buyer.
However, notices have been issued to FMCG Companies and Pharmaceutical Companies asking them to pay tax on free supplies covered under Type A by treating these transactions as covered under Schedule I. According to the news doing rounds, Law Commission has issued a report to the GST Council that tax should not be levied on such free supplies and there should be no requirement of input tax credit reversals as well.
It is observed that many companies have stopped these quantity discounts given the confusion prevailing on the tax treatment and have instead converted these schemes to value discounts at the time of raising invoices but the marketing team of such companies don’t seem to be happy with this idea. Alternatively, in case of Type 1 transaction, the free unit as well as the chargeable units can be offered as a single product (by tying / packaging them together) with a single MRP and then discharging GST on such single MRP.
5. Availment of Input Tax Credit
Availment of credit to a certain extent depends on the taxability at the time of supply of such free samples / free supplies. The same has been summarised below
|Transaction||Outward Supply||Credit Availment|
|Samples – Products are marked as “Physicians Sample” or “Not for sale”||No output tax required to be paid||Credit to be reversed on cost|
|Samples – Products are drawn out of finished goods and then offered as samples||Output Tax to be paid on sale price (Schedule 1 – Permanent Transfer of Business Assets on which credit has been availed)||Credit will be available|
|Free Supplies – Extra Units of the product offered||There is some confusion on the tax treatment. Suggested – Output Tax to be paid on sale price unless the billing or packaging mechanism is changed (Schedule 1 – Permanent Transfer of Business Assets on which credit has been availed)||Credit will be available|
|Free Supplies – Extra Quantity offered in the same unit||No separate treatment – Discharge of tax on the sale of the unit itself is sufficient||Credit will be available|
6. How to disclose these supplies in the returns?
Type 1 – As the Free Samples are not supplies and hence no requirement of disclosing the same as outward supplies in the returns. The credit relating to the same can be disclosed in Table 4 of the Form GSTR 3B as Ineligible ITC under Section 17(5) or Credit Reversal under “Others” if credit was already availed.
Type 2 – Free Samples will be treated as outward supplies and will have to disclosed as taxable outward supply in Table 4 of Form GSTR 3B as B2C sale.
Free Supplies do not attract credit reversal nor are they additional supplies and hence do not require any specific disclosure in the returns.
In case you decide to pay output tax on the same then raise a B2C invoice and accordingly disclose the same in Form GSTR 3B and Form GSTR 1.