It is a common practice in certain industries to provide free sample. Under this practice samples are provided to prospective buyers without any consideration. After experiencing such sample buyer places the order. Consideration is essential to constitute a supply under GST except in cases of the activities mentioned under Schedule I of the CGST Act. As samples are provided without any consideration, no GST is payable on the free sample unless the activity falls within the ambit of Schedule I. If samples are provided to related person it will amount to supply even if provided without any consideration.
Relevant Provisions
Scope of Supply
In terms of section 7(1) of the CGST Act, the expression supply includes-
- All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
- The activities specified in Schedule I, made or agreed to be made without a consideration.
Activities which shall be treated as supply even if made without consideration
Schedule I of the CGST Act enumerates the activities which shall be treated as supply even if made without consideration. Para 1 of the Schedule I provides that permanent transfer or disposal of business assets where input tax credit has been availed on such assets would be treated as supply. Therefore, only those transactions would be a supply where input tax credit has been availed in respect of the business assets. It can be said that Para 1 is not applicable in cases where the supplier has sourced the goods with the intention to give them as a free sample.
No Input Tax Credit on Free Sample
Clause (h) of sub-section (5) of section 17 of the CGST Act, stipulates that input tax credit shall not be availed in case of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Accordingly, input tax credit can not be claimed in respect of the goods supplied as free sample. However, where the activity of distribution of free samples amounts to supply in terms of the provisions of Schedule I, the supplier would be eligible to claim input tax credit.
In view of the above provisions, it can be inferred that the activity of providing free samples does not qualify as ‘supply’ under GST, except where the activity falls within the ambit of Schedule I of the CGST Act. Consideration is an essential ingredient to constitute a supply. As free samples are given without consideration to the unrelated persons, it does not amount to supply. Accordingly, goods given as a free sample do not attract GST except where the activity falls within the ambit of Schedule I of the CGST Act. Further, no input tax credit can be claimed in respect of the goods distributed as free sample.
Clarification by way of Circular
The CBIC vide circular no 92/11/2019 -GST dated 07-03-2019 clarified that samples which are supplied free of cost, without any consideration, do not qualify as ‘supply’ under GST, except where the activity falls within the ambit of Schedule I of the CGST Act. Relevant portion of the circular has been reproduced below-
“A. Free samples and gifts:
i. It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the expression “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as ‘supply’ under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as ‘supply’ under GST, except where the activity falls within the ambit of Schedule I of the said Act.
ii. Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. However, where the activity of distribution of gifts or free samples falls within the scope of ‘supply’ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.”