Free supplies of goods and services have been frequently used by businesses to promote their products in the market. The situation arises when the receiver/ buyer tries to obtain good quality material at a bargained price in the market. It will be beneficial for the receiver to keep the value of the product at factory-priced or the value of services at low-cost budgets.
Before the implementation of the new indirect tax regime, there have been enormous legal proceedings that, does Central Excise Duty, Customs Duty, or Service Tax will be imposed or not on the free supplies of Goods/ Services.
Generally, the government authorities are opposed to permitting the value of supplies of goods/ services, until some particular compliance is mentioned under the laws. Post GST implementation, the main question that arises is whether the taxes will be applicable to the free supply of goods and services or not.
According to Section 9 of the CGST Act, there is a charge implied on supply. Supply in further terms has been defined under Section 7 of the Act, as “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”.
Therefore, under this section when there is a consideration made, then it can be considered supply and when there is no consideration or exchange of money under GST, the taxes will not be imposed on the free supply of goods and services.
Before the implementation of the GST Regime, the tax was levied on the free supply of goods and services are described below:-
- Under the Central Goods and Services Tax (CGST) Act, the tax was levied on the supply of goods and services from the customer to the manufacturer. This was mentioned and explained under 1 to Rule 6 of the Valuation Rules.
- Under the Customs Duty Act, customs duty was applicable on the imports of free supply of goods to the importer. The rules are determined under Rule 10(1) of Customs Valuation Rules.
- Under Finance Act 1994, the service tax was imposed on the free supply of goods to the receiver. This is mentioned under notification 11/2012 – ST dated 17.03.2012 in respect of Works Contract Services as defined in the Act.
Read Also: GST: Impact of New Taxation Structure on Works Contract
Under Finance Act 1994, the service tax was imposed on the free supply of goods to the receiver. This is mentioned under notification 11/2012 – ST dated 17.03.2012 in respect of Works Contract Services as defined in the Act.
Section 15(2) The transaction value under subsection (1) shall consist – of “The value, apportioned as appropriate, of such goods and/or services as are supplied directly or indirectly by the recipient of the supply free of charge or at a reduced cost for use in connection with the supply of goods and/or services being valued, to the extent that such value has not been included in the price actually paid or payable.”
From the above statement, clarifies that the government authorities have added some special compliances under the GST law, wherever it was deliberate to include the free supplies of goods for imposing suitable taxes.
On the basis of Section 15 of the CGST Act as well as CGST Valuation Rules Prescribed under (Chapter IV), it is observed that the legal proceedings concerned eliminated
Now on examination of section 15 of the CGST Act and the CGST Rules on Valuation (Chapter IV), it is seen that the legislature has consciously omitted to add the provision contained in GST model law (as stated above) on free supply. That means the GST law does not lay down any situation where the value of a free supply of goods/services to the recipient in the course or in furtherance of business, can be taxed.
Input Tax Credit Reversal on Free Supplies of Goods and Services
Under Section 16 (1) of the CGST Act regarding Input Tax Credit (ITC). In this section, it has mentioned that every registered person under GST is eligible to avail of the input tax credit on any supply of goods and services that can be used in the course or furtherance of business. A person is entitled to avail the credit if the inputs or input services supplied are used ‘in the course or in furtherance of business. Thus, there is no requirement in law that inputs of input services must be used for making taxable supplies only, mere use in the course or furtherance of business is enough.
The above statement, clarifies that a registered person is eligible to utilize Input Tax Credit on all types of supplies, that can be used in creating free supplies, such types of free supplies are created in the course or to promote business.
However, Goods, as well as services, are both used for business purposes and considered as a matter of principle, ITC is allowable. But, there are some specific exceptions regarding this general principle and all of the exceptions are determined under Section 17. If in case the government denies providing ITC or asks for the reversal of the credit, it has to be established that ITC availed comes under any of the exceptions of Section 17. If the revenue is unable to get established, the government authorities are liable to maintain the right of revenue entailment of the receiver.
If the exceptions or matters are covered under Section 17 of the CGST Act, then the receiver is eligible to reverse the credit.
Let us understand with an example, whenever the goods are supplied free of cost, and the goods are lost or destroyed, then the ITC has to be reversed. Section 17 (5) (h), deals with the denial of credit.
Furthermore, no supplier distributes any of the goods for free. The goods distributed free are already included taxes such as logistics, marketing and so forth and the taxes being paid by the supplier.
As per the above statement, no reversal of credit will be required for inputs services that can be used in creating free supplies, as such there is no particular compliance mentioned under the law for the reversal of GST credit tax suffered on free supplies of goods.
GST Payment on Free Supplies
Whenever the goods are supplied free of cost, as such no compliances are involved and thus, the supply would not consider a taxable supply, as per section 7 of the CGST Act.
Free Supplies and Job Work
Whenever free supplies of goods/ services are provided to the receiver, the ownership remains the same with the supplier. Thus, the free supplies of goods and services do not come under the definition of ‘works contract‘ under section 2 (119), so no transfer of property in goods is included.
I have Given Free Services of Advt. to some people. Do I need to Issue a NIL invoice to that person or I just don’t require to show that services nowhere?
In case free services are provided such transaction is not treated as the supply of goods and services and as such, there is no requirement to issue an invoice as per GST act but you can issue an invoice for your records.
What are the documents required for sending a Free Sample to my supplier who is in abroad as later I will be buying the materials from them? (Here documents means, Do I need to prepare any Invoice for the same & will Tax arise?)
Sample value will be maximum up to 5000 INR
Please suggest.
Another query is as below.
Dear Sir/Madam,
Refer to the email subject we have few queries related to GST Tax Input Credit & Export Sales.
Below is the scenario.
We are the manufacturer of Sheet Metal Components/Panels/Cabinets etc. & are registered here in Maharashtra, Navi Mumbai under GST with having a valid GST registration No. We have a client which is a foreign entity & is not registered here in India. They have placed an order to us & have asked to deliver the material to their one of the client who is established in India & having their GST registration in multiple states. We will be receiving our payments from our client who is outside India.
Based on above we have following queries: –
1. What kind of Sales Invoices, we need to issue to our client. (Will it be a simple Tax Invoice/Export Sales Invoice)?
2. Since physically we are not dispatching the materials outside India (Export), as the ship to address will be somewhere in India & Place of Supply will be according to that. (Do we still need to raise an Export Sales Invoice just because our Bill to Party is outside India or we can raise a Normal Tax Invoice to the client)?
3. What is the proper way to complete this transaction by following the GST rules?
4. In case, we can raise a Normal Tax Invoice to the buyer, Will the ship to address, Consignee, able to Take the GST Tax Input Credit?
5. Is there any other way for GST Tax liability exemption under any circumstances? (LUT or Bond) & that’s also without entering into an SEZ Area because that will again attract additional expenses & the landing cost will increase.
Hope the concerned will do the needful & will respond accordingly.
A prompt & the positive response will be highly appreciated.
What is the maximum value of free goods which can be exported now?
There is no maximum value for free goods to be exported.
We want to send some free sample to our US customer for approval. Now, what is the procedure to be followed in under GST rule?
In case free samples are to be sent such supply is made without consideration, therefore, such not be liable for GST. Normal export provisions for sending such samples need to be followed.
hello… my business is propaganda cum distribution business in pharma… I purchase finished products from the manufacturer in my company name along with the item brand name.. I have the deciding authority to sell my brands at my own pricing(MRP OF THE PRODUCT) and scheming (BUY 10 STRIPS GET 2 STRIPS FREE). SO should I charge the GST tax for the free strips.. kindly do help me…
GST is not charged on free strips as according to Section 7 the definition of tern supply says all forms of supply of goods or services made or agreed to be made for a consideration in the course or furtherance of business. GST is charged on the supply of goods so anything supplied without consideration i.e. free of cost shall not be liable for GST.