GST on free samples as part of marketing

Whether a festive season right around the corner or any other event, every other month in India, businesses often give out free samples of their products and services to potential and existing clientele, as part of their branding awareness and marketing campaign. This allows them the opportunity to increase their existing market share in that industry.

But the main question thus arises, on what will be the tax impact for the GST regime on such.

FAQ’s

1. If such free samples fall under the purview of supply under the GST act and, if so, if required to pay the liable tax on such freebies?

From the definition of supply given under the GST Act, 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 the course or furtherance of business ,it can be concluded that to constitute a “supply” following elements are required to be satisfied:-

It should be made in the course or to further a business & there should be some consideration involved.

Now it has been specifically mentioned that some activities are to be treated as supply even if made without consideration when they are between related persons or distinct persons

When made in the course or to further a business, provided the gifts do not exceed Rs.50, 000 in value in a financial year by an employer to an employee, or agent to principle or vice versa.

Also permanent disposal constitutes as supply without consideration where ITC has been availed on such assets.

 It shall not be treated as a supply of goods or services or both. Subsequently in case of supply of Gifts exceeding Rs. 50,000 to employees the ITC on their Procurement shall have to be reversed.

From above, it can be noted that supply of free sample does not fall under the category of activities to be treated as supply even if made without consideration.

Note: Free sample cannot be classified as business asset where input tax credit has been availed.Hence, the transaction of free or sample products does not quality as supply. Thus, taxable event will not arise and hence is not applicable on the same.

2. Now, some times, when goods or services are given as free samples as part of sales promotion, either they are given individually, or they are given as part of a whole basket, that is, as a part of a bundle.

Sales Promotion is an expense directly incurred for the purpose to further a   Business and hence the same is directly covered under the term "Supply" and would be chargeable to tax irrespective of the value of supply & Subsequently, ITC on their procurement shall be available.

In this case, free gifts are provided on the purchase of a particular product. These kinds of supply fall under the category of mixed supply which cannot be naturally bundled. Thus these kinds of gifts will fall under the category of supply and taxable to GST at the Rate applicable to the main supply & Subsequently, ITC on their procurement shall be available.

3. When promotional goods are given with the company branding (logo) on them if they gifts that are provided without any consideration they fall under the definition of gift ¬ supply &hence ITC needs to be reversed. However, if these items are not given to related parties then the same will be treated as supply leading to the charge of GST & subsequently ITC will be available on them.

Conclusion

In case of free and sample products, GST is not applicable as it doesn’t fall under the definition of supply. Also, input tax credit pertaining to goods which has been disposed of by way of free sample is not available under GST.Hence ,that goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample is not eligible for input tax credit.

Every registered person under GST is eligible to avail input tax credit on any supply of goods and services that can be used in the course or furtherance of business but input tax credit is not available for free sample. If input tax credit has been availed than the taxpayer, then the taxpayer must reverse input tax credit pertaining to goods which are to be disposed of by
way of free sample.