IMPACT OF FREE SUPPLY ON GST

CA ASHU DALMIA , RAKESH CHITKARA, DR.MARIAPPAN GOVINDARAJAN.

IMPACT OF FREE SUPPLY ON GST

Introduction

The GST laws are on the anvil. Many a complications has arised and the same are to be resolved by the GST council and the Government. One among the problem faced by the business industries are the taxability of GST on free supply of goods or services or both. In this article the impact of free supply on GST is discussed in detail.

Goods

Section 2(52) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) defines the term ‘goods’ as every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Services

Section 2(102) of the Act defines the term ‘services’ as anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Supply

Section 7(1)(a) of the Act provides that all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Consideration

Section 2(31) of the Act defines the term ‘consideration’ in relation to the supply of goods or services or both as including-

any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

A deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Valuation of taxable supply

Section 15 provides the procedure for valuation of supply of goods or services or both. Section 15(1) provides that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

According to section 15(1), the supplies made between the related persons, the price is the sole consideration for the supply. Therefore whatever the supplies made between the related person, even if it is supplied freely it would attract GST. Therefore we have to know who are coming under the purview of ‘related persons’. The explanation (a) to section 15(1) provides that persons shall be deemed to be “related persons” if–

such persons are officers or directors of one another’s businesses;
such persons are legally recognised partners in business;
such persons are employer and employee;
any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
one of them directly or indirectly controls the other;
both of them are directly or indirectly controlled by a third person;
together they directly or indirectly control a third person; or
they are members of the same family;

Explanation (b) provides that the term “person” also includes legal persons. Explanation (c) provides that persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related. Even para 2 of Schedule I stipulates that supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.

Section 15(3) provides that the value of the supply shall not include any discount which is given–

before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
after the supply has been effected, if–

such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

Thus ‘discount’ will not be included in the value of taxable supply if there is an agreement in this regards and the discount amount is specified in the invoice.

Section 15 does not expressly or impliedly exclude the free supply for the purpose of calculation of valuation of taxable supply.

Schedule III

Schedule III to the Act provides the list of goods or services which shall be treated as neither a supply of goods nor a supply of services. In this list also free supply of goods or services is not found.

Therefore there may be confusion whether the free supply would be liable to tax or not and eligible to avail input tax credit or not.

Free supply

The expression ‘free supply’ has not been defined in the Act. In common parlance it may be meant as the supply of goods or services or both without consideration. The goods may be supplied freely whether it comes under the purview of GST or not; whether exempted goods or not. Section 17(5)(h) of the Act provides that no input tax credit is available for the goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. This section specifically says ‘free samples’ and not ‘free supply’.

Giving discount will not amount to free supply since there are provisions under section 15(3) in regard to give discounts which will not be liable to tax subject to the fulfillment of conditions stipulated in that section.

Gift given by the business entities to its customers or dealers also do not amount to free supply. Gift is a separate concept in which consideration shall not be present. There should be no condition for giving gift. It should be voluntary. The recipient is also to accept the gift offered by the giver. The gift given by one person to another person will not be subject to any condition. Taxability on free supply may be decided on case to case basis.

Free supply may be due to various reasons. If the supply is provided exclusively free of cost without consideration, it may be exempted from the taxability. For example the services provided in the Government Hospitals are free and without consideration. Such activities are not coming under the purview of GST. Even some private charity hospitals are doing such activities.

Employer may give free supplies of goods in the course of his employment such as T-shirt etc., Such free supply in GST is termed as ‘gift’ given by the employer to his employees. Employer and employees are considered as related persons. However para 1 of Schedule III provides that the services provided by the employee to his employer in the course of or in relation to his employees shall not be treated as supply. The proviso to para 2 of Schedule I provides that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. If the gift exceeds Rs.50,000, then it would amount to taxable.

Free supply of goods is common in business world. It is a marketing concept to attract customers to purchase their products or availing services. It is very common practice in the pharmaceutical to give free samples of medicines to doctors. But for this the Board gives clarification specifically. In case of clearance of physician samples distributed free of cost, the ITC availed on the said samples has to be reversed in view of the provisions under Section 17(5)(h) of the CGST Act, 2017. No tax is payable on clearance of physician samples distributed free of cost as the value of supply is zero and no credit has been availed. Such free samples are distributed through the branch offices, then the supply of free samples made between the principal to the branch office is liable to GST. The free samples supplied by the branch offices to the consumers would not be liable to GST. However the branch office has to reverse the input tax credit to the extent the value of free samples.

It is common that in some periods some products are sold along with a free product. For example Horlicks may be supplied with a free bowl. The customer gets both Horlicks and bowl at the price of Horlicks. He is not going to pay for the bowl. Whether this transaction is liable to GST? As per the law the transaction value should be for both Horlicks and the bowl. Whether the cost of bowl may be decided as the discount rate to the consumer? If it is considered as dispute, as per the requirement of Section 15(3) there should be an agreement between the seller and the purchaser. It is not possible to make agreements with all customers by the sellers. For this purpose the CBIC issues clarifications in FAQ as below-

Question - How the Invoicing should be done for free goods given along with sale so that corresponding input tax credit is not required to be reversed for products under scheme?

Answer - Invoice Value would include value of all goods including those supplied free. In such cases, ITC is not required to be reversed.

Threshold limit

Section 22 of the Act provides for registration. According to this Section a person, whose aggregate turnover exceeds Rs.20 lakhs or Rs.10 lakhs in respect of special category of States (now it is proposed to increase Rs.20 lakhs) he is required to register under the GST provisions. The aggregate turnover includes the following-

Supply of goods or services that is chargeable to tax under GST Act;
Supply of goods or services that attracts no tax or which is wholly-exempt from tax and also includes non-taxable supply;
Stock transfers between different states;
Export of goods and services.

Till crossing the threshold limit the person is not liable to levy GST on free supply also.

Conclusion

Except few clarifications in relation to free supply of goods there is no clear picture on the levy of tax on free supply. There may be number of litigations in this regard in future. Still clarifications are required from the Department. It is hoped that it would be done to the benefit of the registered persons.

DISCLAIMER

The views expressed in this article are of the author(s). The GSTINDIA.BIZ may not necessarily subscribe to the views expressed by the author(s).

The information cited in this article has been drawn from various sources. While every effort has been made to keep, the information cited in this article error free, any office of the same does not take the responsibility for any typographical or clerical error which may have crept in while compiling the information provided in this article.