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:
|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,
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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