Before understanding the implications of GST on Demo Products, one should first understand from where ‘GST’is arrived. It is defined under the Indian Constitution in Article 366 in Clause 12A “Goods and services tax (GST) means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.” charging section in GST Law. To levy GST on any good or service, it should first be covered under Section 9 of the Central Goods and Services Tax (CGST) Act,2017whichimpose tax on the supply. Supply is covered under Section 7 of the Central Goods and Services Tax (CGST) Act,2017. For interstate supply, the charging section is section 5 of the Integrated Goods and Services Tax (IGST) Act,2017. The charging Section for Inter and intra-state shows the levy and collection of the GST under Section 9 of the CGST Act and Section 5 of the IGST Act,2017 respectively.
To get a better understanding of the topic, the goods and services definition is to be seen as per the Act – “Goods is defined under clause 52 of Section 2 of CGST Act,2017 which means every kind of moveable property other than money and securities but including actionable claims, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.” “Service is defined under clause 102 of Section 2 of CGST Act,2017 which means anything other than goods, money, and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.” The scope of Supply is covered under section 7 of the CGST Act,2017. It is an inclusive definition of supply in which two basic conditions are to be satisfied to call Supply to levy GST. First, the activity covered is for the furtherance of business, and second, it is made for consideration except for Schedule I where Activity will be treated as supply even if without consideration. As per Section 7(1)(c), “Activities without consideration is not a Supply except activities covered under Schedule I, that is Permanent Transfer or disposal of Business Assets or Supply of Goods or Services between Related Persons or Distinct person.” Demo products are goods or services which are provided to the recipient without consideration. Since, as per Section 7 to constitute supply, one of the conditions of consideration is not satisfied in free samples or demo products unless it is covered under Schedule I. If there is no consideration, there is no GST liability.
WHAT ARE DEMO PRODUCTS?
Demo products whether it is goods or services are given to customers to try before buying them. The demo is given without any consideration as a free sample or demo service. Since one condition is missing out of two to be called a Supply under GST. If an activity is not a Supply, then GST will not be levied on the same.
Central Board of Indirect Taxes & Customs (CBIC)issued a clarification on various doubts related to the treatment of Sales Promotion schemes under GST registered Circular No. 92/11/2019-GST dated 7th March 2019.” It is clear in that circular that samples that 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. One of the Sales promotion schemes is Free Samples or say free demos for which GST is not levied on the same but ITC has taken on Input, Input Services, and capital goods that need to be reversed. In a practical scenario, it is a challenge that the industry is facing the bifurcation of Input credit used for taxable supply or free supply.
Since, if a Taxable person claims excess ITC as allowed under the provisions of the Act, then they will be liable for penal provisions and if ITC claimed is less than what was allowed then it will be a loss to the company to claim lower ITC. So, to circumvent this challenge, the law should include such free samples under the ambit of GST to claim the ITC on the same, if any. It is a cumbersome task to bifurcate ITC on taxable supplies which can be availed and ITC on free samples which need to be reversed.
One of the schemes is Buy1 Get 1 free, it is specifically mentioned in the scheme that it is not a free supply instead price is charged as one for two or more products, so GST will be leviable on the same and ITC is also available. Other Schemes like trade discount etc. is also covered under normal GST provisions and constitutes Supply and also ITC on the same is available. Law is clear that if there is no GST Liability then there will be no input tax credit on the same output service or good or both. But in the industry, it is quite a cumbersome task to bifurcate such ITC.
EFFECT OF INPUT TAX CREDIT (ITC) ON DEMO PRODUCTS:
The Demo products that the supplier provide to the customer also take some input goods/input service or capital goods to provide such demo products to its customers. On those Input Goods/Services or Capital Goods, the Supplier has taken ITC to pay its output liability of GST. So, since Demo products are not treated as a Supply because it is without consideration, ITC taken on such Demo products need to be reversed as per Section 17(5)(h) of the CGST Act,2017.
So, with the above discussion, if any product or service is provided as Demo Product that is without consideration except Schedule I, then it is not treated as Supply and no GST liability is levied on the same. If the Demo products are covered under Schedule I which is an activity provided to related persons or distinct persons without consideration then it is treated as a Supply and GST will be levied on the same. Demo Products are not covered in sale promotion schemes such as Buy 1 and Get 1 free or discount allowed on quantity sales, etc. Therefore, GST liability will be the same as per normal provisions and ITC will be available for the same.ITC is not available on the demo products or free samples. So, it should be reversed which is a practical challenge in the industry. To circumvent this challenge GST council should include free samples in the ambit of supply and ITC should be available on the same.
Author(s) Name: Gunjan Baweja
The Constitution of India, 1949, Art. 366,amended by The Constitution (One Hundred One Amendment), Act,2016.
The Central Goods and Services Tax Act, 2017, § 2, Acts of Parliament,1949(India).
Central Goods and Services Tax Act, 2017, § 7, Acts of Parliament,1949(India).
Central Board of Indirect Taxes and Customs (CBIC), Department of Revenue,Ministry of Finance, Government of India, https://taxinformation.cbic.gov.in(last visited Nov. 8,2022).