Deepak Gupta | Jul 23, 2017 |
Free Supplies under GST Law | Taxability of Free Samples under GST
Transfer/disposal of goods or right in goods, Gift to employee, free sample, Buy one get one free, replacement under warranty, GST on motor vehicle, under GST act 2017.
17(5) notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:
(a) Motor vehicles and other conveyances except when they are used
(i) for making the following taxable supplies, namely:(A) further supply of such vehicles or conveyances ; or (B) transportation of passengers; or (C) imparting training on driving, flying, navigating such vehicles or conveyances;(ii) For transportation of goods;
(g) Goods or services or both used for personal consumption;
(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
(i) Permanent transfer or disposal of business assets without consideration, where input tax credit has been availed on such assets shall be deemed supply-Schedule-I
(ii) Where goods forming part of the assets of a business are transferred or disposed, whether or not for a consideration, such transfer or disposal is a supply of goods by the person-Schedule-II
Examples:-
Q. Star Furniture Enterprise, a sole proprietor, is in the business of selling furniture. Its owner has took a set of furniture to his home.
Ans. The transfer of the furniture by the owner for personal consumption is not a supply of goods as per schedule I, because credit is block in case of personal consumption u/s 17(5)(g).
Q. A GST registered retailer is in the business of supplying mineral water. His family is consuming 100 bottles of mineral water regularly every month.
Ans. The disposal of the mineral water for his familys consumption is not a supply of goods as per schedule I, because credit is block in case of personal consumption u/s 17(5)(g).
Q. An individual buys a car for personal use and after a year sells it to a car dealer for a consideration. Will the transaction be a supply in terms of GST ACT
Ans. No, because supply is not made by the individual in the course or furtherance of business. Further, no input tax credit was admissible on such car at the time of its acquisition as it was meant for non-business use.
Q. An individual buys a car for Business use and after two year transfer car for personal consumption at home. Will the transaction be a supply in terms of GST ACT
Ans. No, input tax credit will not be admissible on such car at the time of its acquisition and therefore it is not be a supply without consideration under GST as per schedule I.
Q. ABC Ltd., is in the business of Hotel. He purchase AC for business purpose and after 2 years, he transfer the AC to director without consideration. Will the transaction be a supply in terms of GST ACT
Ans. Yes, it shall be a deemed supply as per schedule I and supplier has to pay an amount determined according to sec 18(6).
Section 18 (6) In case of supply of capital goods or plant and machinery on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.
It is also logical where GST on supply is less than the amount determined under rule 8 of ITC rule. You have to pay the reduce credit to the extent not carry forward to recipient.
Example:
Suppose you have purchase a furniture and claim ITC of RS 1,00,000/-
After one year you sale that furniture and calculate GST of Rs 70,000/-
Reduce credit according to rule 8 will be Rs. 80,000/-Then you have to pay Rs 80,000 to Government according to sec 18(6).
Differential amount of RS 10,000/- credit not transfer to recipient has to pay in excess to GST charge of RS 70000/-.
Reduce credit is of RS 80,000/- and Credit carry forward as GST is Rs 70,000/-
So you has paid to Government of RS 80,000/- and charge GST from customer of RS 70,000/-Customer Take ITC of GST paid of Rs.70, 000/-.
Q. ABC ltd is registered under GST and operates as a supplier of laboratory equipment. The company acquired a car for its director which is not allowed for input tax claim. After the car had been used for 5 years, the company sale the car to a second hand car dealer for RS 2, 00,000. Will the transaction be a supply in terms of GST ACT
Ans. The sale of the car for a consideration is a supply of goods even if credit is not claim.
Q. An insurance company disposes its used computer by giving it to a charitable organization.
Ans. The disposal of the computer is a supply of goods and supplier has to pay an amount according to sec 18(6).
In case of a dealer of motor vehicle, the credit is allowed to the dealer. Sec 17(5) has provided that Input tax credit shall not be available in respect of the motor vehicles and other conveyances except when they are used for making the further taxable supply of such vehicles or conveyances.
Dealer working under margin scheme–
Government by notification exempts intra-State supplies of second hand goods received by a registered person, dealing in buying and selling of second hand goods and who pays the central tax on the value of outward supply of such second hand goods as determined under sub-rule (5) of rule 32 of the CGST Rules, 2017, from any supplier, who is not registered, from the whole of the central tax leviable thereon under sub-section (4) of section 9 of the CGST Act, 2017.
Transfer of Right in Goods;-
(ii)Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;-Schedule-II
(i) Private or personal use or Used for the purpose other than business
ABC Ltd. bought a tractor to be used in its own construction business. However, after 2 years he put the tractor to be used in the agriculture business without transfer of title, it shall be supply of service, whether or not for a consideration, according to schedule-I read with schedule II.
(ii) Made available for another persons use but not done in the course or furtherance of the business of the goods owner
ABC Ltd. bought a bulldozer to be used in its own construction business. However, it made the bulldozer available to be used in the construction business of its sister company for 2 months without transfer of title. In this case, the usage of bulldozer for any purpose other than its own business purpose, whether or not for a consideration, is a supply of services by ABC Ltd according to schedule II.
Transfer of capital Goods
| S.no | Sec 18(6) | Schedule II para 4 (b) |
| 1 | In case of supply of capital goods or plant and machinery, on which input tax credit has been taken | goods held or used for the purposes of the business goods are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business |
| 2 | Transfer of title of capital goods | Transfer of right to use of goods |
| 3 | Treated as supply of goods | Treated as supply of service |
| 4 | Pay an amount | Pay GST |
| 6 | Apply only if credit is taken | Apply even if credit is not taken |
| 7 | It deals with Capital Goods or P&M | It deals with Capital Goods, Inputs and Input Services. |
Sec 17(1) Goods or service used for business or non -business purpose.
Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
XYZ Enterprise, a sole proprietor, is in the business of electrical and construction business. It has used purchase a machine and used them for both the business. The credit shall be available because the word any business has been used in sec 17(1).
Example;-
Q. XYZ Enterprise, a sole proprietor, is in the business of construction. He has purchase a tractor which is used by him for business or non-business purpose.
Ans. The XYZ Enterprises has to reverse the credit of capital goods, as per rule 8 of the ITC rule.
Q. ABC, a sole proprietor in the business of electronics, purchase 4 AC. It has took 2 AC for non-business purpose
Ans. The credit of 2 AC used for personal consumption shall not be allowed as per sec 17(5) (g).
Q. ABC, a sole proprietor, is in the business of textile. He purchase 10 meter Fabric and made 2 shirt from this Fabric. He has took 1 shirt for personal purpose.
Ans. 50% credit shall be allowed as per sec 17(1), he has to reverse the 50% credit as per rule 7.
Comparative table;-
| S.no | Schedule II para 4 (b) | Sec 17(1) |
| 1 | Goods held or used for the purposes of the business | Goods or services or both are used partly for the purpose of any business and partly for other purposes |
| 2 | Goods are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business | Used for both purpose |
| 3 | Made available to any person for use | Used for own purpose only |
| 4 | Put to private use or are used | Partly used for other purpose |
| 5 | Supply of service | Not a supply |
| 6 | GST payable on transfer | Reversal of credit when used for other purpose |
| 7 | Transfer of AC from office to house for 3 weeks | Mobile phone or laptop used simultaneously for official and personal purpose. |
| 8 | Apply whether credit is availed or not | Apply in case of credit availed |
17(5) notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:
(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
Schedule I
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:
Provided 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.
There is two consequence in case of gift to employee, you cannot claim credit and has to pay GST if gift amount is more than 50000/- in a financial year to an employee.
To read provisions of Gifts by Employer to Employee in details Click Here
17(5) notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:
(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;
(i) Permanent transfer or disposal of business assets without consideration, where input tax credit has been availed on such assets shall be deemed supply-Schedule-I
Reversal of credit is required in case of free sample according to sec 17 (5) (h).it will be not a supply under schedule I
Buy one get one free;– Not required to reversal of credit, it will be treated as mixed supply.
Free replacement under warranty; – Not use for personal consumption, free sample or gift, therefore reversal of credit is not required it will be treated as mixed supply. You has supply a right with goods for single price.
GST Twitter clarification on free replacement under warranty and Buy one get one free;–Not required to reversal of credit.
Conclusion: The GST is destination based consumption tax that means tax will go to the consuming state and recovered from end consumer. In case of registered person credit of car is not claimable, but on sale of such car, GST is accountable and this will be amount to double taxation. Similarly if you gift to employee you have to pay GST and no ITC allowed.
The double taxation is intentionally in case of motor vehicle and gift to employee to curb the practice of claiming personal expenses as business expenses for income tax benefit.
If you add in the parks of employee salary, then you have not required to pay GST on gift to employee.
Comparative chart;-
| S.No | Gift made in Individual capacity | Gift by employer to employee | Gift to other than employee |
| 1 | ITC is not allowed | ITC is block u/s 17(5)(h) | ITC is block u/s 17(5)(h) |
| 2 | No benefit of income tax | Claim as employee expenses | Claim as expenses |
| 3 | Income tax on gift more than 50,000 /- | Non- cash gift >5,000/- taxable as salary and cash gift > 50,000/- taxable as IOS. | Income tax on gift more than 50,000/- |
| 4 | No GST on outward supply | GST on supply, if the value of gift exceeds 50,000. | No GST on outward supply |
Similarly you cannot claim GST paid on motor vehicle as input tax and has to pay GST on sale of such car for a consideration, in compare to Individual who has not liable to pay GST on sale of second hand car.
Comparative chart;-
| S.No | Car in Individual Capacity | Car used in business | Car dealer | Car dealer under margin |
| 1 | No ITC | ITC is block u/s 17 | ITC allowed | No ITC |
| 2 | No benefit in income tax | Claim depreciation | No depreciation | No depreciation |
| 3 | No GST outward supply | GST on outward supply | GST on supply | GST only on margin |
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