EXPORT OF FREE SAMPLES – WHETHER REVERSAL OF GST INPUT TAX CREDIT IS MANDATORY ? AN ANALYSIS
Exporters are required to ship free of cost samples to prospective buyers & required to get the model/designs confirmed by the buyers before manufacturing/despatching bulk quantities. Hence in this article let us discuss practical tax and procedural implications of exporting free samples.
Relevant section which says ITC is NOT available for free samples ?
SECTION 17 ( 5) (h) of CGST Act 2017
(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;
Circular No. 92/11/2019-GST dated 7th March, 2019 clarifies various doubts related to treatment of sales promotion schemes under GST. Sl 2 ( A) of this circular reads as follows:
A. Free samples and gifts:
i. It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the expression “supply” includes 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. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as 'supply' under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as 'supply' under GST, except where the activity falls within the ambit of Schedule I of the said Act.
ii. Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. However, where the activity of distribution of gifts or free
samples falls within the scope of 'supply' on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.
Hence from Section 17 (5) (h) of CGST Act 2017 and Circular No. 92/11/2019-GST dated 7th March, 2019 we can conclude that goods or services or both which are supplied free of cost shall not be treated as 'supply' under GST and input tax credit shall not be available to the supplier on the inputs & input services.
The debatable issue :
If the export free samples are trading items then the shipper can identify the relevant input tax credit and can reverse it. But in case the final sample product is totally different from input raw material and allied input services, the quantum of ITC to be reversed can not be identified easily.
There is no mechanism prescribed in the law to determine the amount of reversal in such situations. Hence a reasonable method can be adopted like estimating the per unit ITC from costing data and shall reverse it accordingly.
Since No foreign exchange is earned, exporters are advised to ship free of cost samples with proper GR waiver from AD/banker subject to annual limits prescribed as per RBI Master Directions and should file free shipping bill only under SB scheme code 99 NFEI i.e not to avail duty drawback and any other incentives/scheme from Government.