Introduction
Free samples are a common marketing tool, particularly in the pharmaceutical, FMCG, and cosmetics industries. The question arises: Can a business claim ITC on goods distributed as free samples?
The answer is no. ITC on free samples must be reversed under Section 17(5)(h). This guide explains the legal framework, the CBIC circular, and the compliance requirements.
Legal Framework: Section 17(5)(h) of the CGST Act, 2017
Blocked Credit on Free Samples
Section 17(5)(h) blocks ITC on goods disposed of by way of gift or free samples.
Circular No. 92/11/2019-GST
The CBIC Circular No. 92/11/2019-GST dated 07.03.2019 clarified that samples supplied free of cost, without any consideration, do not qualify as 'supply' under GST, except where the activity falls within Schedule I.
ITC Reversal Requirement
The circular 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.
Documentation Required
- Sample Distribution Register: Record of all free samples distributed.
- Board Resolution: Approval for the sample distribution programme.
- Reversal Calculation: Computation of the ITC to be reversed.
- GSTR-3B Disclosure: Disclosure of the reversal.
Best Practices
- Reverse ITC: Reverse ITC on all free samples distributed.
- Maintain Records: Document the sample distribution programme.
- Distinguish BOGO Offers: Buy One Get One Free offers are treated differently from free samples.
- Reconcile Annually: Reconcile sample distribution and ITC reversal in the annual return.
- Seek Professional Assistance: Where the sample programme is significant, seek guidance.
Conclusion
ITC on free samples distributed to customers must be reversed under Section 17(5)(h). The CBIC Circular No. 92/11/2019-GST clarifies that free samples do not qualify as supply and ITC must be reversed. Proper documentation is essential.
Distributing free samples? Anuj Desai & Associates provides expert guidance on ITC reversal and compliance. Contact us today.
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- Email: office@anujdesaiassociates.com
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