Free Samples are exempt supply under GST Law requiring reversal of credit on capital goods, inputs and input services

By RS Sharma Advocate

To pay GST on free samples or to reverse credit on inputs, input services and capital goods are options available for the suppliers under GST Law.

Schedule I of CGST Act, 2017 specifies activities which are to be treated as Supply even if made without consideration. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets is specified activity under said Schedule. The stock of samples is current asset and is, therefore, treated as business assets. Hence it is a case of supply within GST law.

Further, even if it is assumed that Free sample is a case of non-taxable supply under GST it leads to bigger liability under GST Law. Section 17(2) of CGST Act, 2017 provides that “Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies

The next issue which arises for consideration is whether supply of free samples is a case of exempt supplies or not. Section 2(47) of CGST Act, 2017 defines it as under:

(47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

Thus even non-taxable supply is covered within ambit and scope of “exempt supply” under GST Law and the provision of restriction of credit under Section 17(2) of CGST Act are attracted. Section 17(6) of CGST Act, 2017 provides that the Government may prescribe the manner in which credit referred to in sub-sections(1) and (2) may be attributed.

The Formula for attribution of credit of inputs or input services and capital goods has been prescribed vide Rule 42 & 43 of CGST Rules, 2017 as under:

Rule 42. Manner of determination of input tax credit in respect of inputs or input services and reversal thereof.- (1) The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(a) the total input tax involved on inputs and input services in a tax period, be denoted

as ‘T’;

(b) the amount of input tax, out of ‘T’, attributable to inputs and input services intended

to be used exclusively for the purposes other than business, be denoted as ‘T1’;

(c) the amount of input tax, out of ‘T’, attributable to inputs and input services intended

to be used exclusively for effecting exempt supplies, be denoted as ‘T2’;

(d) the amount of input tax, out of ‘T’, in respect of inputs and input services on which

credit is not available under sub-section (5) of section 17, be denoted as ‘T3’;

(e) the amount of input tax credit credited to the electronic credit ledger of registered

person, be denoted as ‘C1’ and calculated as-

C1 = T- (T1+T2+T3);

(f) the amount of input tax credit attributable to inputs and input services intended to

be used exclusively for effecting supplies other than exempted but including zero rated

supplies, be denoted as ‘T4’;

(g) ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person

at the invoice level in FORM GSTR-2;

(h) input tax credit left after attribution of input tax credit under clause (g) shall be

called common credit, be denoted as ‘C2’ and calculated as-

C2 = C1– T4;

(i) the amount of input tax credit attributable towards exempt supplies, be denoted as

‘D1’ and calculated as-

D1= (E÷F) × C2

where,

‘E’ is the aggregate value of exempt supplies during the tax period, and

‘F’ is the total turnover in the State of the registered person during the tax period:

Provided that where the registered person does not have any turnover during

the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall

be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details

of such turnover are available, previous to the month during which the said value of

‘E/F’ is to be calculated;

Explanation: For the purposes of this clause, it is hereby clarified that the aggregate

value of exempt supplies and the total turnover shall exclude the amount of any duty

or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and

entry 51 and 54 of List II of the said Schedule;

(j) the amount of credit attributable to non-business purposes if common inputs and

input services are used partly for business and partly for non-business purposes, be

denoted as ‘D2’, and shall be equal to five per cent. of C2; and

(k) the remainder of the common credit shall be the eligible input tax credit attributed

to the purposes of business and for effecting supplies other than exempted supplies but

including zero rated supplies and shall be denoted as ‘C3’, where,-

C3 = C2 – (D1+D2);

(l) the amount ‘C3’ shall be computed separately for input tax credit of central tax,

State tax, Union territory tax and integrated tax;

(m) the amount equal to aggregate of ‘D1’ and ‘D2’ shall be added to the output tax

liability of the registered person:

Provided that where the amount of input tax relating to inputs or input services used partly for the purposes other than business and partly for effecting exempt supplies has been identified and segregated at the invoice level by the registered person, the same shall be included in ‘T1’ and ‘T2’ respectively, and the and the remaining amount of credit on such inputs or input services shall be included in ‘T4’. 

Rule 43. Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.- (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(a) the amount of input tax in respect of capital goods used or intended to be used

exclusively for non-business purposes or used or intended to be used exclusively for

effecting exempt supplies shall be indicated in FORM GSTR-2 and shall not be

credited to his electronic credit ledger;

(b) the amount of input tax in respect of capital goods used or intended to be used

exclusively for effecting supplies other than exempted supplies but including zero-rated

supplies shall be indicated in FORM GSTR-2 and shall be credited to the electronic

credit ledger;

(c) the amount of input tax in respect of capital goods not covered under clauses (a) and

(b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of

such goods shall be taken as five years from the date of the invoice for such goods:

Provided that where any capital goods earlier covered under clause (a) is

subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing

the input tax at the rate of five percentage points for every quarter or part thereof and

the amount ‘A’ shall be credited to the electronic credit ledger;

Explanation.- An item of capital goods declared under clause (a) on its receipt shall not

attract the provisions of sub-section (4) of section 18, if it is subsequently covered under

this clause.

(d) the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under

clause (c), to be denoted as ‘Tc’, shall be the common credit in respect of capital goods

for a tax period:

Provided that where any capital goods earlier covered under clause (b) is

subsequently covered under clause (c), the value of ‘A’ arrived at by reducing the input

tax at the rate of five percentage points for every quarter or part thereof shall be added

to the aggregate value ‘Tc’;

(e) the amount of input tax credit attributable to a tax period on common capital goods

during their useful life, be denoted as ‘Tm’ and calculated as-

Tm= Tc÷60

(f) the amount of input tax credit, at the beginning of a tax period, on all common

capital goods whose useful life remains during the tax period, be denoted as ‘Tr

and shall be the aggregate of ‘Tm’ for all such capital goods;

(g) the amount of common credit attributable towards exempted supplies, be denoted

as ‘Te’, and calculated as-

Te= (E÷ F) x Tr

where,

‘E’ is the aggregate value of exempt supplies, made, during the tax period, and

‘F’ is the total turnover of the registered person during the tax period:

Provided that where the registered person does not have any turnover during

the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall

be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details

of such turnover are available, previous to the month during which the said value of

‘E/F’ is to be calculated;

Explanation.- For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied

under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of

List II of the said Schedule;

(h) the amount Te along with the applicable interest shall, during every tax period of the

useful life of the concerned capital goods, be added to the output tax liability of the

person making such claim of credit.

(2) The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax.

Tax Payers are left with the following two options:

Option1. Treat Supply of free samples as Taxable Supply under GST and pay GST.

Option 2. Treat Supply of free sample as Non-Taxable Supply (which is deemed exempted Supply) and reverse the credit attributable on inputs, input services and capital goods. When GST Returns are filed ; the supply of free sample has to be shown under non-taxable or exempted supply and the rigours of Rule 42 and 43 will apply.

Exercising Option 1 can turn out to be more convenient and less taxing than opting for option 2.

Free sample is no more free under GST Law. Whatever credit is coming in GSTR2 is not entirely yours as there are many restrictions on utilising the credit.

(Writer is Managing Partner of Law Firm RS Sharma Associates based in Gurgaon. He is advising several MNCs and Indian Corporates on GST issues. He can be reached at rssharma@gmail.com )

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