Gst On Free Of Cost Supplies

Many customers at times express distress with the free of cost supplies offered with the product or services. Such free of cost supplies are being offered, generally, to attract more and more customers. Such free of cost supplies are offered, generally, to attract more and more customers. To encourage more sales, for example, the customer receiving free supply of goods worth Rs.100 on purchase of goods worth Rs.1000. Apart from customer satisfaction from the vendors perspective, understanding and complying Goods and Service Tax (GST) provisions for the free of cost supplies are also essential. The present article tries to explain the

GST provisions attached to the Free of Cost (FoC) supplies.

Taxability of Free of Cost Supplies under GST

GST shall treat ‘Supply’ as a taxable event. Meaning that GST is applicable or payable only in the case of ‘supply’ of goods and/or services. As per Section 7 of CGST Act 2017, the term supply shall cover all the forms of supply of goods or services when done for a consideration. Then one could question about the

supply of goods or services provided without consideration. For getting the answer, one shall reason through the sub-section provided to Section 7. Going through sub-section to Section 7, one can settle that supply without consideration shall apply through sub-section (c) of Section 7. Sub-section (c) covers the activities which are to be treated as supply even when made without consideration as per Schedule I. Thus, from the above paras, it can be concluded that the free of cost supplies does not cover within the definition of term supply. However, free of cost supplies covered as per Schedule I qualifies as ‘supply’ under GST. Para I of Schedule I states transferring or disposing of business assets permanently and availing input tax credit (ITC) availed on such assets would be treated as supply. It shall apply even when such assets are transferred without consideration. Thus, other than such qualifying assets, any other free of cost supply shall not qualify as ‘supply’ under GST.

Clarification Issued by the Board

The Central Board of Indirect Taxes and Customs (CBDT) clarified various points about free of cost supplies through circular no. 92/11/2019-GST dated 7th March 2019. The explanation of the circular are as follows:

Supply

The board clarified that the term ‘supply’ covers the supply of all the goods and services performed for consideration. Hence, in the case for free of cost supplies of goods and services, it doesn’t qualify as ‘supply’ under GST. Apart from in case of activities covered as per Schedule I.

Input Tax Credit

The board clarified that the supplier cannot avail

input tax credit of inputs; input services or capital goods used in relation to supplies made without consideration, i.e. free of cost supplies. The supplier would be eligible only to avail the input tax credit in respect of the supply covered as per Schedule I. Scroll down for more information on the Circular

Back to Learn

Frequently Asked Questions

Common questions about GST on Free of Cost Supplies.

Under GST, free of cost supplies are generally not considered a 'supply' and hence not subject to GST, except for specific cases covered under Schedule I of the CGST Act, such as permanent transfer or disposal of business assets on which input tax credit has been availed.

Free samples or gifts provided by companies to customers without any consideration are not considered a 'supply' under GST and hence not taxable, unless they involve permanent transfer or disposal of business assets on which input tax credit has been availed.

No, a company cannot claim input tax credit on inputs, input services, or capital goods used for providing free of cost supplies, except for the cases covered under Schedule I of the CGST Act.

If the free maintenance services are provided as a bundled offering along with the purchase of a product, and no separate charges are collected for the services, then it is not considered a separate supply and hence not taxable under GST.

No, free of cost supplies that do not qualify as 'supply' under GST need not be reported in the GST returns, except for the cases covered under Schedule I of the CGST Act.

No, a company cannot recover GST paid on inputs used for providing free of cost supplies, as input tax credit is not available for such supplies, except for the cases covered under Schedule I of the CGST Act.

No, the GST treatment for free of cost supplies is the same for both goods and services. The key factor is whether the supply qualifies as a 'supply' under GST, and not the type of supply (goods or services).

No, the value of free of cost supplies that do not qualify as 'supply' under GST need not be included in the value of taxable supplies for the purpose of calculating GST liability.

Yes, free of cost supplies provided by a company to related parties or employees, without any consideration, are generally not considered a 'supply' under GST and hence not subject to GST, except for the cases covered under Schedule I of the CGST Act.

While there are no specific documentation requirements for free of cost supplies that do not qualify as 'supply' under GST, companies should maintain proper records and supporting documents for any free of cost supplies that fall under Schedule I of the CGST Act, as they would be subject to GST and related compliance requirements.