Free samples and gifts offered with purchases as well as popular ‘buy-one-get-one-free’ deals may attract the proposed Goods and Services Tax (GST) levy which government plans to roll out from April next year.
The model GST law, unveiled by the government last week for stakeholder comments, says that any supply sans any consideration will attract tax. This would cover free gifts and samples as well as buy-one-get-one-free deals, tax experts said.
Section 3 of the model GST law defines a supply of goods and services to include ones “made or agreed to be made without a consideration.”
Under the Schedule-1 for ‘Matters to be Treated as Supply Without Consideration’, the law further goes on to define them as “Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.”
Simply put, buyers will have to pay GST on articles they receive free.
“GST will be entirely based on the concept of a ‘supply’, which now includes even goods and/ or services supplied without consideration by a taxable person in the course of or furtherance of business,” said Rohit Jain, Partner, Economic Laws Practice.
KPMG India National Head (Indirect Tax) Sachin Menon said, “This will impact the sales and marketing cost of companies which follow the system of free samples or free supply strategy such as “buy one get one free.”
Presently, for a free sample of goods, excise duty is payable but VAT/ CST is not payable. However, proportionate input tax credit under VAT is reversible in some states.
“The net impact for businesses will therefore be the difference between the existing Excise and VAT cost, and the GST which will become payable,” Jain said. “Similarly, complimentary services (for which no charges/ fees are payable) which do not currently attract Service tax, will suffer GST.”
GST, which the government plans to roll out from April 1 next year, is to subsume central levies like excise duty and service tax as well as state levies of VAT/sales tax, entertainment tax, luxury tax, octroi, entry tax, purchase tax and state cess and surcharges.
Linked to the provision of taxing free supplies is the value to be attributed to such free goods/ service. Tax experts said this will ordinarily be based on the value of identical or similar goods/ services, or on the cost plus mark-up for such goods/ services.
According to Nangia &Co Partner Nitish Sharma, the transaction value shall include the value of such goods and/or services as are supplied directly or indirectly by the recipient of the supply free of charge or at reduced cost for use in connection with the supply of goods and/or services being valued, to the extent that such value has not been included in the price actually paid or payable.
Menon said the section 3 of the model law make the free supplies in the course of business either to another registered or unregistered dealer or to an individual, taxable.
Sharma said, “post supply discounts or incentives known at or before the time of supply, shall not form part of the transaction value. Also the discount allowed in the course of normal trade practice may not form part of the transaction value”.
Apart from this, certain other goods/ service transactions without consideration are also treated as supplies under GST, including permanent disposal of business assets as well as assets retained by a business after deregistration.