Shoppers browse assorted edible oil products at a D-Mart supermarket operated by Avenue Supermarts Ltd. in Thane. (Photographer: Dhiraj Singh/Bloomberg)

Consumer Goods Makers Won’t Be Taxed On Buy-One-Get-One-Free Offers

Consumer goods makers won’t have to pay tax on that extra bar of soap offered free or two additional biscuits in a pack to lure buyers.

The companies can also claim input tax credit on freebies offered under such promotional schemes, according to a circular on the website of the Central Board of Indirect Taxes and Customs.

The clarification comes as a breather for companies which were asked by the Directorate General of Goods and Services Tax Intelligence to pay tax on free products or extra grammage. The department had approached companies as they don’t pay goods and services tax on freebies but claim credit for taxes paid on manufacturing inputs, BloombergQuint had earlier reported.

On offers such as ‘buy two get one’ for the same product, a company doesn't have to pay GST, but can claim input tax credit for the whole product, Mayank Shah, category head at Parle Products Ltd., told BloombergQuint. But on unrelated free samples or gifts, he said, the company will have to pay GST and also won’t be to claim tax credit.

Clarity Over Pricing

The Department of Revenue cited a provision in the Central Goods and Services Act—section 7(1)(a)—that says goods or services supplied free shall not be treated as “supply”.

It may appear that one item is given free in such offers, but it’s not actually free, but a single price is charged for the entire package, according to the circular. Such supply or sale of goods can be treated as sale of two goods for the price of one, it said, adding that input tax credit shall be available to the manufacturer for both.

How It Will Be Taxed

If two different products are sold together then the tax will have to be paid on the item which attracts the higher rate of tax. For example, a steel spoon offered free with a pack of tea will attract 12 percent GST—the tax rate on the spoon, not 5 percent applicable on tea.

Sumit Lunker, an indirect tax partner at PwC India, said the clarification provides clarity to the industry on reversal of credits on one-on-one free promotional offers. “This is a much-needed relief.”

Relief For Pharma Industry

The government clarified that free drug samples supplied by pharmaceutical companies shall not be treated as supplies or individual sale of products.

The circular—citing Section 17 (5)(h) of CGST Act—said the input tax credit will not be available if “goods are lost, stolen, destroyed, written off or disposed of by way of gift or free sample”.

If the pharmaceutical company is supplying free samples, it will not have to pay GST on it, but it will not be eligible to avail input tax credit, said Abhishek Jain, an indirect tax partner at EY India.

This, according to Shah, might create a problem. When you are dealing with spoilt stock or stock that is returned then it becomes an issue, he said. “As a supplier, you’re always dealing with them.”

The government has clarified that for discounts that are known at the time of sale can be adjusted from the value and the GST liability reduced accordingly, Jain from EY India said. “In cases where discounts are not known or given at the time of sale, like say for, product-related reasons, GST will have to paid on the sale value itself,” he added. Such discounts are given in business-to-business transactions.