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Input Tax Credit On Free Samples

GST Advisor
Author: Sunil Agnihotri
Posted On: Monday 02 April 2018

Tags: GST Input Tax Credit Free Samples & Promotional items Input Tax Reversal GST Input Tax Reversal Input Tax Reversal on Goods sent as free samples

Section 16 of CGST Act, 2017 provides entailment of credit of input tax, which reads as under-

Section 16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 17(5)(h) of the of CGST Act, 2017 provides that no input tax credit is available if goods lost, stolen, destroyed , written off or disposed off by way of gift or free sample. Hence on combined reading of the above, Input tax credit on inputs & services used in free sample should be reversed.

If no consideration is received for any supply then as per Rule 27 of Valuation Rules the value could be determined and GST is payable thereon. For your ready reference the said rule reads as under-

  1. Value of supply of goods or services where the consideration is not wholly in money.-Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-

(a) be the open market value of such supply;

(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;

(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;

(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order. 

If goods are supplied free of cost, the value of the goods will be equal to the value of other goods that are of similar kind and quality. Similar goods are goods that are supplied under similar circumstances that, in respect of their characteristics, quality, quantity, functional components, materials, and reputation, are the same as, or closely or substantially resemble, each other.

Hence, Option1. Treat Supply of free samples as Taxable Supply under GST and pay GST. Follow rule 27 of CGST Rules, 2017 for valuation of free samples.

However, Section 7 of CGST Act, 2017 provides that -

Section 7. (1) For the purposes of this Act, the expression “supply” includes––

(a) 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;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Under this provision when any activity like sale, transfer, barter, exchange, licence, rental, lease or disposal is carried out of goods or services for a consideration in the course or furtherance of business then it would be treated as supply and such supply would be taxable, unless exempted by some notification.

Schedule I of CGST Act, 2017 specifies activities which are to be treated as ‘supply’ even if made without consideration. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets is specified activity under said Schedule. The stock of samples is current asset and is, therefore, treated as business assets. Hence it is a case of supply within GST law.

Section 17(2) of CGST Act, 2017 provides that “Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies”

Section 2(47) defines “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

Thus even non-taxable supply is covered within ambit and scope of “exempt supply” under GST Law and the provision of restriction of credit under Section 17(2) of CGST Act are attracted. Section 17(6) of CGST Act, 2017 provides that the Government may prescribe the manner in which credit referred to in sub-sections (1) and (2) may be attributed.

The Formula for attribution of credit of inputs or input services and capital goods has been prescribed vide Rule 42 & 43 of CGST Rules, 2017 as under:

Rule 42. Manner of determination of input tax credit in respect of inputs or input services and reversal thereof.- (1) The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(a) the total input tax involved on inputs and input services in a tax period, be denoted as ‘T’;

(b) the amount of input tax, out of ‘T’, attributable to inputs and input services intended to be used exclusively for the purposes other than business, be denoted as ‘T1’;

(c) the amount of input tax, out of ‘T’, attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as ‘T2’;

(d) the amount of input tax, out of ‘T’, in respect of inputs and input services on which credit is not available under sub-section (5) of section 17, be denoted as ‘T3’;

(e) the amount of input tax credit credited to the electronic credit ledger of registered person, be denoted as ‘C1’ and calculated as-

C1 = T- (T1+T2+T3);

(f) the amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero rated supplies, be denoted as ‘T4’;

(g) ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2;

(h) input tax credit left after attribution of input tax credit under clause (g) shall be called common credit, be denoted as ‘C2’ and calculated as-

C2 = C1– T4;

(i) the amount of input tax credit attributable towards exempt supplies, be denoted as ‘D1’ and calculated as-

D1= (E÷F) × C2

where, ‘E’ is the aggregate value of exempt supplies during the tax period, and ‘F’ is the total turnover in the State of the registered person during the tax period:

Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated;

Explanation: For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule;

(j) the amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as ‘D2’, and shall be equal to five per cent. of C2; and

(k) the remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting supplies other than exempted supplies but including zero rated supplies and shall be denoted as ‘C3’, where,-

C3 = C2 – (D1+D2);

(l) the amount ‘C3’ shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax;

(m) the amount equal to aggregate of ‘D1’ and ‘D2’ shall be added to the output tax liability of the registered person:

Provided that where the amount of input tax relating to inputs or input services used partly for the purposes other than business and partly for effecting exempt supplies has been identified and segregated at the invoice level by the registered person, the same shall be included in ‘T1’ and ‘T2’ respectively, and the and the remaining amount of credit on such inputs or input services shall be included in ‘T4’. 

In short –

T

Total input and input service in a tax period (month)

T1

Input tax attributable on input and input services exclusively used for other than business purpose

T2

Input tax attributable on input and input services exclusively used for exempted supplies

T3

Input tax attributable on input and input services on which credit is not available under Section 17(5)

C1=T-(T1-T2-T3)

Amount of input tax credit credited to electronic credit account

T4

Input tax attributable on input and input services intended to be used other than exempted supplies but including zero rated

C2=C1-T4

Common credit = Total credit less T1, T2, T3

E

Aggregate value of exempted supplies during the tax period

F

The total turnover in State during the tax period

D1=(E/F)*C2

The amount of tax credit attributable towards exempted supplies

D2=5% of C2

The amount of credit attributable for non-business purpose

C3=C2-(D1+D2)

Common credit which is eligible for attributable for business and zero rated supply but other than exempted supply

D1 and D2

To be added to output tax liability

Rule 43. Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.- (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(a) the amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-2 and shall not be credited to his electronic credit ledger;

(b) the amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated in FORM GSTR-2 and shall be credited to the electronic credit ledger;

(c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as five years from the date of the invoice for such goods:

Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger;

Explanation.- An item of capital goods declared under clause (a) on its receipt shall not attract the provisions of sub-section (4) of section 18, if it is subsequently covered under this clause.

(d) the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c), to be denoted as ‘Tc’, shall be the common credit in respect of capital goods for a tax period:

Provided that where any capital goods earlier covered under clause (b) is subsequently covered under clause (c), the value of ‘A’ arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof shall be added to the aggregate value ‘Tc’;

(e) the amount of input tax credit attributable to a tax period on common capital goods during their useful life, be denoted as ‘Tm’ and calculated as-

Tm= Tc÷60

(f) the amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, be denoted as ‘Tr’ and shall be the aggregate of ‘Tm’ for all such capital goods;

(g) the amount of common credit attributable towards exempted supplies, be denoted as ‘Te’, and calculated as-

Te= (E÷ F) x Tr

where,‘E’ is the aggregate value of exempt supplies, made, during the tax period, and ‘F’ is the total turnover of the registered person during the tax period:

Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated;

Explanation.- For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule;

(h) the amount Te along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.

(2) The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax. 

Hence Option 2. - Treat Supply of free sample as Non-Taxable Supply (which is deemed exempted Supply) and reverse the credit attributable on inputs, input services and capital goods. When GST Returns are filed; the supply of free sample has to be shown under non-taxable or exempted supply and the rigours of Rule 42 and 43 will apply. 

In Short-

(a)

Input tax in respect of capital goods intended to be used exclusively for non-business purpose or for exempted suplies shall not be credited in electronic credit ledger

(b)

Input tax in respect of capital goods intended to be used exclusively for business purpose or for zero rated suplies shall be credited in electronic credit ledger

A

Input tax in respect of capital goods not covered under above shall be credited in electronic credit ledger (useful life will be 5 years from the date of invoice)

(c)

The capital goods covered under (a) above is used subsequently for business purpose shall be credited in electronic credit ledger reducing 5% of quarter or part thereof

Tc

The aggregate amount of 'A' denoted as Tc

(d)

The capital goods covered under (b) above is used subsequently covered under (c) value 'A' should be reduced in electronic credit ledger reducing 5% of quarter or part thereof

Tm=Tc/60

The amount of input tax credit of common capital goods during its useful life

Tr

The amount of input tax credit of common capital goods, at the begining of the tax period, whose useful life remains during the tax period, would be aggregate of Tm of all capital goods

E

Aggregate value of exempted supplies during the tax period

F

The total turnover in State during the tax period

Te=(E/F)*Tr

The amount of common credit attributable on exempted supplies

Te

To be added to output tax liability along with applicable interest

 

Te shall be seperately calculated to IGST, CGST, SGST & UTGST

Exercising Option 1 can turn out to be more convenient and less taxing than opting for option 2.

Free samples are no more free under GST Law. Whatever credit is coming in GSTR2 is not entirely yours as there are many restrictions on utilising the credit.

Please feel free to write to us on sunilag@vsnl.com / mitesh@apmh.in for any further queries on the above blog.

 

 

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