Introduction
Under GST, "supply" generally requires consideration. But there are exceptions — activities specified in Schedule I that are treated as supply even without consideration. The question arises: When is GST applicable on free-of-cost (FOC) supplies?
This guide explains the legal framework, the Schedule I exceptions, and the practical implications.
Legal Framework: Section 7 and Schedule I of the CGST Act, 2017
Supply Requires Consideration
Section 7(1)(a) defines supply as all forms of supply of goods or services made for a consideration by a person in the course or furtherance of business.
Schedule I Exceptions
Schedule I lists activities treated as supply even if made without consideration:
- Permanent Transfer of Business Assets: Where ITC has been availed on the asset.
- Supply Between Related Persons or Distinct Persons: In the course or furtherance of business.
- Principal-Agent Supplies: Supply of goods by a principal to his agent or by an agent to his principal.
- Import of Services: From a related person or from other establishments outside India.
FOC Supplies That Are Taxable
- Related Party Transactions: FOC supplies to related persons are taxable.
- Distinct Person Transfers: FOC transfers between distinct persons (e.g., branches in different states) are taxable.
- Permanent Transfer of Business Assets: Where ITC was availed, the transfer is taxable.
- Import of Services: From related persons is taxable.
FOC Supplies That Are Not Taxable
- Free Samples and Gifts: Not treated as supply; ITC must be reversed.
- Promotional Items: Where given without consideration and not to related persons.
- Employee Gifts Below ₹50,000: Not treated as supply.
ITC Implications
- Taxable FOC Supplies: Where the FOC supply is taxable under Schedule I, the supplier can claim ITC and must pay GST on the supply.
- Non-Taxable FOC Supplies: Where the FOC supply is not taxable, ITC must be reversed under Section 17(5)(h).
Best Practices
- Determine Taxability: Assess whether the FOC supply falls within Schedule I.
- Document the Transaction: Maintain records of all FOC supplies.
- Reverse ITC Where Required: Reverse ITC on FOC supplies that are not taxable.
- Pay GST Where Applicable: Pay GST on FOC supplies that are taxable under Schedule I.
- Seek Professional Assistance: For complex FOC transactions, seek guidance.
Conclusion
GST on free-of-cost supplies applies only where the supply falls within Schedule I — related party transactions, distinct person transfers, permanent transfer of business assets, and import of services from related persons. Other FOC supplies are not taxable, but ITC must be reversed.
Making free-of-cost supplies? Anuj Desai & Associates provides expert guidance on taxability and ITC reversal. Contact us today.
Contact us:
- Email: office@anujdesaiassociates.com
- Phone: 9619456656
- Website: https://anujdesaiassociates.com
- LinkedIn: linkedin.com/in/ca-anuj-desai-122547230