The popular ‘buy one get one free’ deals stand to lose some of their charm as the proposed goods and services tax (GST) may apply to free articles given away with those purchased.
As per Section 3 of the model GST law that the government has unveiled for stakeholder comments, supplies specified in Schedule I, made without a consideration, are also liable to GST.
This means that the buyer will have to pay GST on the article that comes free, said tax experts, confirming that the provision will impact the popular sales.
They called for clarity on the issue as the wider implication is that even free samples given by way of business promotion could attract GST.
“Any form of direct or indirect GST on free supplies could have a significant impact on the sales & marketing spend of companies, specifically those dealing in consumer products,” said Pratik Jain, national indirect tax leader at PwC.
Prashant Raizada, partner – indirect tax at BDO India, said, “The model GST Law does not provide any specific guidance on taxability of free samples issued by an entity to a prospective customer.”
The provision is in line with the prevailing excise duty treatment (excise applies on free supplies as well), but marks a significant deviation from value-added tax (VAT) principles, experts said.
“This emerges from the shifting of taxable event from manufacture/sale to supply,” said YG Parande, senior adviser, indirect tax, at Deloitte Haskins & Sells LLP. The government is keen to implement this crucial reform in indirect taxes that would replace multiple state and central taxes with a single GST.
The model law has been endorsed by the empowered committee of state finance ministers.
Experts also pointed out that Entry 5 of Schedule I of the model law covers “supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business”. “On a perusal of the said clause, it seems that free samples may potentially attract levy of GST on the value thereof as determined in terms of the GST Valuation Rules,” Raizada of BDO said.
The draft law proposes reversal of GST credit attributable to non-taxable or exempt supplies, but it does not say if free goods and supplies would be covered. “While the GST law clearly lays down that supplies for business promotion without a consideration would be a supply, yet it fails to provide a clarity whether it would be treated as an exempt supply for reversal of credits,” said Bipin Sapra, partner at EY. Marko Dano JerseyShare This