What is the Treatment of GST on Free Supply By CA Ruhi Kalra

It is a known principle that “nothing comes free in business” and the same is a proven fact in the recent ruling by Maharashtra Authority for Advance Ruling (AAR) in the case of Biostadt India Ltd and the circular 92/11/2019-GST which clarifies issues on the treatment of sales promotion schemes under GST.

Several promotional schemes are offered by suppliers to increase the sales volume and to attract new customers.  It is a common practice among certain sections of trade and industry, to provide free samples and gifts. For example, pharmaceutical companies often provide drug samples to their stockists, dealers, medical practitioners etc., without charging any consideration.  

The Hon’ble Maharashtra AAR vide its Advance Ruling “GST-ARA-72/2018-19/B-165 held that ITC on “gifts” will not be available when no GST is being paid on their disposal.


Whether Input Tax Credit (ITC) can be claimed by the taxpayer on the procurement of Gold coins which are to be distributed to the customers at the end of the scheme period for achieving the stipulated payment criteria. Further, whether ITC can be claimed in all such similar situations?


  1. Empowering section for claiming input tax: Section 16(1) of the CGST Act, creates a vested right upon the registered person to claim a credit of ITC on goods or services or both procured by the taxpayer provided they are used for the furtherance of business.
  2. Furtherance of Business: The notable requirement under Section 16(1) is that the credit of ITC which is to be claimed should be used in the course of furtherance of business. The term furtherance of business is not defined in the law. Dictionary meaning of furtherance implies advancement, promotion of scheme etc.
  3. Blocked Credits: Section 17(5)(h) of the CGST Act provides for blocked credits. This section contains a non-obstante clause, which states that even if all the conditions mentioned in the empowering sections for availing ITC have been fulfilled, for the following supply, ITC cannot be availed:

Goods lost, stolen, destroyed, written off or disposed of by way of free samples or “gift”

  1. Definition of gift: The term gift is not defined under the CGST Act. Reference has been given to the Gift Tax Act, which defines gift as a transfer by one person to another of any existing movable or immovable property voluntarily or without consideration in money or money’s worth.

  1. The applicant had the contractual agreement with the customer wherein if he purchases a certain amount of company’s product or makes payment in a prescribed manner then he shall be entitled to a gold coin of a specific weight. The gold coin will not be available to the customer unless he specifies the criteria laid under the scheme.
  2. The applicant contended that gold coins distributed to customers at the end of scheme period cannot be qualified as “gift” and further contended that the sales linked scheme are purely for the advancement of company’s business. Each and every act is done for business comes with consideration. Applying the same analogy, gold coins are not given freely to the customers.

  1. The gold coins are not inputs because the distribution of gold coin is not in line with the business model of the company. Gold coins are not essential for continuity in supply and the distribution of gold coins are not concerned with the making of the taxable supply.
  2. As per section 16(1) of the Act, a taxpayer is entitled to take credit of input tax charged on any supply of goods or services to him which are used in the course of furtherance of business i.e. this section disallows ITC against input goods/services used for non-business purposes.
  3. Section 17(5) (h) stipulates that credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by the way of gift or free samples.
  4. A gift is normally seen as an enticement to customers as in the subject case which would bear heavily on the consumers in making purchase of particular quantities and above.
  5. Further, if the giver of the gift does not pay output tax on the same then compensation to the department would be the foregoing of ITC on such gifts.
The above ruling is also supported by the clarificatory circular 92/11/2019-GST issued by CBIC, which gives clarification on the following issues:

Nature of supply


Treatment of ITC


Free sample of gifts

Goods or services or both which are supplied free of cost shall not be treated as supply under GST

No ITC available according to section 17(5)(h)

Not required

Buy one get one offer

It is not an individual supply of free goods but a case of two or more individual supplies where a single price is charged.

ITC available

Taxability of such supply will be dependent upon as to whether the supply is a composite supply, or a mixed supply and rate of tax shall be determined accordingly.

Buy more save more offers

Such type of discounts offered by the suppliers shall be excluded to determine the value of supply provided the provisions to avail discount as per section 15 are satisfied.

ITC available

Value of discount will be excluded from the transaction value

Secondary discounts (not known at the time of supply)

Secondary discounts are not excluded to determine the value of supply, as these discounts are provided on the basis of the credit notes

No impact

Value of discount will not be excluded from the transaction value


On the basis of the aforementioned ruling and the circular, it can be said that all the free supplies that are given to promote the sales are to be treated as gifts as these are primarily supplied without consideration. Therefore, any supply on which tax is not payable, the input tax credit cannot be availed. Any of the conditions to avail the ITC as per section 16(1) will not be fulfilled in such supplies, hence non-obstante clause of Section 17(5) shall be applicable, thereby concluding that any input on free supplies is blocked and not claimable.

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