DrugMart sells a popular antibiotic to chemists. Two promotional schemes this quarter:
- "Buy 6 boxes, get 1 free": chemists who order 6 boxes get an extra "free" box. Used to push volumes.
- Diwali appreciation gifts: ₹4 lakh worth of branded watches + chocolates distributed to top 50 doctors / chemists. Not against any sale; pure relationship gesture.
At GST audit, the officer flags both. The "free" box: ITC on that inventory must be reversed under Sec 17(5)(h). The Diwali gifts to doctors: deemed supply under Schedule I — must charge output GST on the FMV. DrugMart's CFO didn't budget for either.
- Sec 17(5)(h) blocks ITC on "goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples". So if you give something free (true freebie, no consideration), the ITC you originally claimed on those inputs must be reversed.
- Schedule I to CGST Act deems certain transactions as "supplies" even without consideration — most notably, supplies between distinct persons (e.g., branches in different states) and supplies to related persons.
- "Buy 1 get 1" scenarios — clarified by CBIC Circular 92/11/2019 — are NOT free supplies. They're discounted sales. The buyer is paying for 6 boxes but receiving 7; effectively price per box has reduced. ITC remains intact, no Schedule I.
- Pure gifts to dealers / doctors (no underlying sale linkage) — Sec 17(5)(h) blocks the ITC on the gift items. If above ₹50,000 in aggregate per recipient — also deemed supply under Schedule I if recipient is related.
- Promotional schemes done right: structure as discounts (visible on invoice) rather than free supplies. Maintains ITC + clean invoice trail.
Three scenarios — three GST treatments
Buy 6 + 1 free
Discount scheme
Invoice for 7 boxes at discounted total. Effectively buyer pays ₹600 for 7 boxes (instead of ₹700). ITC intact. No Schedule I issue. CBIC Circular 92/11/2019 confirms this treatment.
Free sample to doctor
Sec 17(5)(h) blocked
Genuinely free, no consideration. ITC blocked under Sec 17(5)(h). Reverse ITC on the cost of the sample. If related-party recipient + aggregate > ₹50k → deemed supply under Schedule I → charge output GST on FMV.
Diwali gift to dealers
Pure gift
Branded watches + chocolates. ITC blocked on the gift items themselves (Sec 17(5)(h)). If gift to "related person" exceeds ₹50,000 per recipient in FY → also deemed supply (Schedule I). If non-related dealer, only the ITC reversal applies.
How CBIC's "buy 1 get 1" clarification works
CBIC Circular 92/11/2019-GST dated 7 March 2019 clarified:
- For "Buy 1 Get 1 free" type promotions where the additional unit is supplied under the same agreement as part of the transaction — it's a composite price reduction, not a free supply. ITC on inputs of the "free" item remains available.
- Invoice must clearly indicate this — e.g., "7 boxes @ ₹85.71 each = ₹600" (where original price was ₹100 for 7 boxes = ₹700). Or "6 boxes @ ₹100 + 1 box @ ₹0" both shown, ITC remains because the transaction as a whole is for consideration.
- Buyer's ITC: based on total invoice value (₹600 in example), recipient claims ITC on ₹600 × 18% = ₹108 (or whatever rate applies).
- Seller's output tax liability: GST on the actual transaction value ₹600 only.
DrugMart's actual exposure
- Buy 6 + 1 scheme: If invoice clearly shows discounted pricing for 7 units, no exposure. If invoiced as 6 sold + 1 free (gift), ITC reversal needed on the "1 free" units' inputs.
- Diwali gifts ₹4L to 50 doctors: pharma + medical gifts to doctors. ITC on ₹4L cost of watches + chocolates (GST ~₹72k at 18% rate) must be reversed. Reverse in GSTR-3B with cause "Sec 17(5)(h) – gift / free samples".
- Plus interest at 18% from the original ITC claim date.
- If aggregate gifts to one recipient > ₹50k AND that recipient is "related" (very high threshold — doctors usually aren't "related" for GST purposes), Schedule I deemed supply triggers. For DrugMart, doctors aren't generally related parties → only the 17(5)(h) reversal applies.
How to structure promotions safely
- Discount on invoice: rather than "1 free", reduce price proportionately. Invoice shows price reduction visibly. CBIC-compliant.
- Volume rebate: separate credit note issued post-supply (Sec 15(3) of CGST Act) — buyer reverses ITC proportionately, seller adjusts output GST. Clean trail.
- Cashback / coupon: post-supply discount via separate transaction. Treated as discount under Sec 15(3) subject to conditions.
- Sample distribution: if essential for business (free trials), accept Sec 17(5)(h) blocked ITC as a cost. Don't try to claim it.
- Festival gifts to dealers: keep aggregate per recipient under ₹50k to avoid Schedule I; accept the 17(5)(h) ITC reversal.
Quick answers
Free trial of a service has different treatment from free goods sample. Services consumed by user without consideration are generally not "supplies" — the user receives no transferable benefit. ITC on costs of running the trial (server, infra) remains. No Schedule I issue unless related-party.
Sec 17(5)(h) covers "lost, stolen, destroyed, written off". ITC must be reversed on written-off / destroyed inventory. If recovered later (e.g., insurance claim received), ITC can be re-claimed in some interpretations — but practice is to leave it reversed.
Gift to employee up to ₹50,000 per FY is exempt under Sec 17(2)(viii) read with Rule 3 (perquisite valuation rule) — and parallel-ly no GST liability. Above ₹50k per employee per FY, becomes taxable perquisite + deemed supply under Schedule I.
Sec 17(5)(fa) (added FA 2023) blocks ITC on goods / services for CSR spend. So CSR-related purchases — no ITC. This is separate from Sec 17(5)(h) which deals with disposal-without-consideration.
If invoiced as 6 units + 1 free → AO will likely treat the "1 free" as gift requiring ITC reversal. Better: 7 units shown with discounted per-unit price. The transaction value is the same; the legal characterisation is "discounted sale" not "free supply".
When you might want help
Two situations: (1) Designing a promotional scheme for FY — invoice format + CBIC-circular alignment + audit-safe documentation. (2) Existing ASMT-10 / DRC-01 demand on free-supplies / gifts — defence reply.
Running promotional schemes?
Pre-launch GST design + invoice format + CBIC-alignment + audit-safe documentation. Fixed scope.
"DrugMart" is a composite illustration. Your specific scheme's treatment depends on actual invoice format + recipient relationship.