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No GST On Pharma Samples, Freebies Explained

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The government provided some relief to the FMCG, food and pharmaceutical retail chains this week after it clarified that promotional schemes will be eligible for input tax credit.

Input Tax Credit (ITC) is the tax that a business has to pay on a purchase so as to use it to reduce its tax liability when it makes a sale. This can be claimed for credit to the extent of GST (Goods and Service Tax) paid already on purchases.

The clarity in this regard comes 2 years after GST was implemented after several recommendations from the industry on the issue. Companies in the FMCG and pharmaceutical sectors used to receive notices from tax authorities asking for a reverse input tax credit on such offers which prompted them to drop such schemes.
Combination products

Suppose a toothbrush is provided free with the toothpaste, the GST will be levied on the combined value. In cases where the two products that are clubbed together but face different rates of GST, the higher tax rate among the two will be the tax rate on the product.

This can still be confusing for some retail chains. For example, in case of a Thali served at a restaurant, while the food products are charged with 5 percent GST, the sweet is charged with 12 percent GST. When served as a ‘thali,’ a 12 percent tax will be imposed on it, considering the highest-of-the-two clause, prompting them to make sweets optional for customers.

As for products like the mobile charger provided along with the phone, there will be no GST on the charger but only on the price of the phone as the buyer’s motive for purchasing the phone is not the charger.

The Central Board of Indirect Taxes and Customs (CBIC), under the Finance Ministry in its circular said, “Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of Section 8 of the said Act.”

Free Pharma samples

Free sample and gifts will not attract GST but no input tax credit will be granted on samples. “Samples which are supplied free of cost, without any consideration, not qualify as supply under GST.”

Buy One Get One Free Offers

The tax authority said that at first, it may appear that one item is being supplied for free without consideration. “In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one’,” the CBIC said.

In offers like ‘Buy One Get One Free’ and discounts on reaching a certain amount in the bill (like 10 percent off on purchases over Rs 5,000), the tax will be charged on the invoice value. GST would be paid on the price recovered from the customer without reversing the input credit.

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