GST on Free Samples and Gifts: Supply, ITC and Schedule I

Businesses give a lot away: samples to prospects, hampers to customers at Diwali, gadgets to top dealers, gifts to staff, and the second shirt in a buy-one-get-one sale. GST treats these very differently. Some are not a supply at all, some are a supply even though nobody paid, and one of them is not free in the first place. What they mostly share is a cost on the input side: credit on goods you give away is blocked. This post works through each case, what to reverse, and what paperwork to raise.

Is a free item a supply at all?

Section 7(1)(a) of the CGST Act defines supply 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 is wide. It covers money, and it also covers anything given in return, such as a promise to buy a minimum quantity or a service rendered back. But where nothing comes back, the core definition is not met.

So a sample handed to a prospective buyer with no strings attached, or a hamper sent to a customer at Diwali, is not a supply. No tax invoice, no output tax, nothing to report in GSTR-1 as an outward supply. CBIC has confirmed this reading for free samples and gifts in a clarification issued in 2019.

Two things can change the answer. The first is Section 7(1)(c), which brings in the activities listed in Schedule I even when they are made without consideration. The second is hidden consideration: if the "free" item is actually part of what the customer is paying for, it is not free. Both are covered below.

When free still counts: Schedule I

Schedule I lists four situations that are a supply even without consideration:

1. Permanent transfer or disposal of business assets on which input tax credit has been availed. Giving away used laptops or office equipment on which you took credit falls here.
2. Supply of goods or services between related persons, or between distinct persons as specified in Section 25, when made in the course or furtherance of business. Distinct persons include two GST registrations of the same business, so a transfer to your own branch in another state is a supply even if no money moves.
3. Supply of goods by a principal to an agent, or by an agent to a principal, where the agent undertakes to supply or receive them on the principal's behalf.
4. Import of services from a related person or from your own establishment outside India, in the course or furtherance of business.

Entry 2 carries a proviso that matters every festive season: gifts not exceeding ₹50,000 in value in a financial year by an employer to an employee are not treated as a supply. It is needed because the explanation to Section 15 deems an employer and employee to be related persons. Without the proviso, every gift to a staff member would be a taxable related-party supply.

The limit runs per employee, per financial year, and counts the value of all gifts together. Once a particular employee's gifts cross ₹50,000, they become a supply between related persons, valued under the related-party rules. The proviso does not say that only the excess is taxable, so the cautious reading is that the year's gifts to that employee become a supply in full. The valuation mechanics are in GST valuation for related-party supplies.

Credit on gifts and samples: Section 17(5)(h)

Section 17(5)(h) blocks input tax credit on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. There is no exception inside the clause. The blocked credits guide covers it alongside the other clauses.

In practice that means two situations:

• Goods bought to give away. Hampers, sweets, gift cards and branded merchandise bought for gifting. Do not claim the credit. The GST on the purchase invoice becomes part of the cost.
• Goods taken out of stock. Finished goods or trading stock that you bought or made with full credit, and later hand out as samples or gifts. Reverse the credit attributable to those units, in the return for the period in which they leave.

The reversal goes in Table 4(B)(1) of GSTR-3B, the row covering Rules 38, 42 and 43 and Section 17(5), as a permanent reversal. GSTR-2B will show the purchase invoice as ordinary eligible credit, because the portal has no way of knowing you gave the goods away. Catching it is your job, usually by tagging gift and sample accounts in the ledger. The GSTR-3B filing guide walks through the table, and the input tax credit rules explainer covers the conditions the rest of your credit must meet.

Clause (h) speaks of goods. It does not mention services, so a free service given to an unrelated person is not caught by this clause. Credit on the inputs for it still has to satisfy the ordinary conditions in Section 16, including use in the course or furtherance of business.

Buy-one-get-one and "free" items in an offer

A "free" item that only comes with a purchase is not free. The customer pays for the offer as a whole, so the price covers both items. CBIC's clarification makes this point directly for buy-one-get-one offers: the second item is not a gift, the offer is a supply of two items for a single price, and tax is charged on the price actually collected.

Three consequences follow:

• Output tax is on the offer price. You do not add notional tax on the "free" item on top of what the customer paid.
• Credit on both items stays. The free item is not disposed of as a gift, so clause (h) does not apply and no reversal is needed.
• The rate depends on how the bundle is classified. If one item is clearly the main supply and the other naturally comes with it, it is a composite supply taxed at the rate of the principal supply. If the items are simply packaged together for a single price, it is a mixed supply taxed at the rate of the item carrying the highest rate. If the items share a rate, the question does not change the tax.

The same logic covers a free mug with a jar of coffee, a free charger with a phone, or a free item with an order above a threshold. If the item is only obtainable by buying, it is priced into the sale. The GST calculation guide shows how to split a tax-inclusive price into value and tax on the invoice.

Diwali gifts to customers, dealers and employees

Festive gifting is where most of these rules land in one month.

For customer and dealer gifts, the simplest control is to book gift purchases to a separate expense head with credit switched off, so they never enter the credit pool. Where gifts come from stock, a monthly journal from the stock register to the reversal row keeps the returns right.

Samples to doctors and trade samples

Physician samples. Pharmaceutical companies send medicine samples, usually marked not for sale, to doctors. The doctor pays nothing, and the doctor is not a related or distinct person, so the samples are not a supply. Credit on the inputs used to make them, or on the purchased samples, is blocked under clause (h). Companies that make samples on the same lines as saleable packs need a method to identify the credit attributable to the sample packs, and should apply it consistently.

Trade samples. A manufacturer sending a few units to a prospective buyer so that it can test them is in the same position. No consideration, no supply, credit reversed on the units sent.

Goods sent on approval are different. If you send goods for the buyer to keep and pay for if they approve, that is a supply that has not been completed yet, not a free sample. Section 31(7) lets you issue the tax invoice when the buyer accepts, or six months from removal, whichever is earlier. Until then the goods move on a delivery challan.

What paperwork to raise

• Genuinely free sample or gift. No tax invoice, because there is no supply. Goods moving without a supply travel under a delivery challan under Rule 55 of the CGST Rules. Record the issue in the stock register, marked as samples or gifts.
• E-way bill. The e-way bill rules cover movement for reasons other than supply, so samples and gifts moved in bulk may still need one if the consignment value crosses the threshold. Check the e-way bill rules and limits and the exemption list.
• Schedule I supply. Transfers to a branch under another GSTIN, and gifts to an employee above the ₹50,000 limit, are supplies, so they need a tax invoice and appear in GSTR-1. The GST invoice rules cover the fields.
• Offer or bundle. One tax invoice for the price charged. Listing the free item on the invoice at zero value is good practice, because it ties the stock movement to the sale.

Worked examples

1. Diwali hampers for customers. A distributor buys 40 hampers at ₹2,000 each plus GST of ₹240 each, and sends them to its customers. The hampers are not a supply, so there is no output tax. The ₹9,600 of GST on the purchase is blocked under clause (h). The distributor does not claim it, and books ₹89,600 as gift expense.

2. Samples from stock. A manufacturer claimed full credit on its inputs. In October it gives away 500 units as trade samples. The credit attributable to the inputs in each unit works out to ₹30. It reverses ₹15,000 in Table 4(B)(1) of the October GSTR-3B and issues delivery challans for the dispatches.

3. Buy-one-get-one. A retailer sells two shirts for ₹1,000 under a buy-one-get-one offer. Tax is charged on ₹1,000, the price collected. There is no separate tax on the second shirt, and credit on the purchase of both shirts stays.

4. Employee gifts across a year. An employer gives an employee a ₹30,000 watch at Diwali and a ₹15,000 gift hamper on the work anniversary. The total is ₹45,000, within the limit, so neither is a supply. If the employer then gives a further ₹10,000 gift in March, the year's total crosses ₹50,000 and the gifts become a supply between related persons. Track gift values per employee through the year, not per occasion.

Free goods are a cost you choose. The credit you lose without choosing is on purchases from suppliers who stop filing, which never reaches GSTR-2B. Checking a supplier's registration and filing history before you pay closes that gap; you can try it on five GSTINs a day with the free GST number search, and the API does the same check in one call at ₹0.50 per verification.

Frequently asked questions