What Is The GST Liability on Free Supply of Goods and Services?

It has been a common norm for free supply of goods and services before their official introduction into the market. This includes the free sample of medicines in pharmacy businesses and other consumer goods in their respective market. With the new GST being introduced, there are certain provisions that you need to know about the free supply of goods and services if you are indulged in any of these kinds of activities.

The primary question that arises out of this situation is whether GST is payable on the free supply of goods and services. According to Section 9 of CGST Act, there is a charge implied on supply. Supply in further terms has been defined under Section 7 of the Act, as “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”. Thus, under this section, only when a consideration is made, then it can be defined as supply. So, when there is no consideration or exchange of money, GST cannot be levied on the free supply of foods and services.

Input Tax Credit on Free Goods and Services

Another information that needs to be dealt with is whether the Input Tax Credit will be reversed on any services that are being provided free of cost. First, it must be understood that the section dealing with the charge in CGST Act, i.e. Section 9 has no relation with ITC Reversal. Both the provisions are independent of each other and should be dealt as such.

Input Tax Reversal on Free Goods and Services

Section 16 of the CGST Act deals with ITC. Here it has been mentioned that any person registered is entitled to any credit on the income tax charged any goods and services that have been used for the purpose of his/her business. It states that the person is completely entitled to the credit if the inputs and the input services that have been partaken to supply are used for the purpose of “in course or in furtherance of business”. Hence, there is no mention of whether the input goods and services should be for taxable supplies only; it can be just because of the reason of furthering your business.

Thus, a person can avail ITC on the free supply of goods and services as they fall under the purview of “furtherance of business”.

Under Section 17(1) of CGST Act, no reversal is required as long as the free supplies are used for promotion of the product or as a marketing sales effort.  Further, Section 17(2) asks for reversal of credit is the free supply of goods and services are done partly for making taxable supplies and partly for making non-taxable supplies. But, under Section 7 of the Act, a free supply is not defined as a supply. So to round it up, under Section 17(2) of CGST Act, reversal is not required for free supply of goods and services.