By CA Surekha Ahuja
Free Samples | BOGO | Extra Quantity | Bundles | Gifts | Promotional Assets | Expired Stock
“FREE” is a marketing word. It is not a GST conclusion.
For an FMCG business, “Buy 1 Get 1”, “Buy 2 Get 1”, “20% Extra”, “Free Sample”, “Free Gift” and “Festival Hamper” may all look like promotions.
Under GST, they can have very different consequences.
The real issue is not merely whether GST is payable on the outward movement. It is also:
What happens to the ITC?
CBIC has specifically clarified the treatment of free samples and “Buy One Get One Free” schemes, making the distinction between a genuine free sample and a multi-item supply for a single price particularly important.
The 7-Point GST Decision Matrix
| # | Promotional scheme | GST view | ITC impact | The question Tax must answer |
|---|---|---|---|---|
| 1 | 🎁 Free Sample | Generally no outward GST if genuinely without consideration | ITC blocked u/s 17(5)(h), subject to the applicable facts | Is it genuinely a free sample? |
| 2 | 🛒 BOGO / Buy 2 Get 1 | Not a separate free supply; treat the transaction as a whole | Generally not a free-sample ITC reversal merely because one item is called “free” | What is the single consideration for the transaction? |
| 3 | 📦 Different Products in One Offer | Composite vs Mixed Supply analysis | Depends on normal ITC eligibility | Are they naturally bundled? |
| 4 | ➕ Extra Quantity Free | Examine whether the extra quantity is part of the same supply | No automatic 17(5)(h) reversal merely because of “free” wording | Is there actually a separate free supply? |
| 5 | 🎁 Gift / Promotional Merchandise | Genuine gift may not constitute outward supply | 17(5)(h) ITC risk | Is it a gift or a business-related transfer? |
| 6 | 🧊 Fridge / Rack / Visicooler | Depends substantially on whether ownership is transferred | Depends on the nature of the transaction | Who owns the asset after placement? |
| 7 | 📉 Expired / Destroyed Stock | No GST merely because goods are destroyed | 17(5)(h) ITC block | Has the write-off, destruction and ITC treatment been properly documented? |
Section 17(5)(h) specifically covers goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
1. FREE SAMPLE: No Output GST Does Not Mean No GST Cost
Suppose a company distributes a product sample free of charge, with no consideration.
Generally, there is no supply under GST, except where Schedule I applies.
But there is a second question:
What happens to the ITC?
Section 17(5)(h) blocks ITC in respect of goods disposed of by way of gift or free samples.
CBIC Circular No. 92/11/2019-GST specifically clarifies that ITC is unavailable to the extent inputs, input services and capital goods are used in relation to gifts or free samples distributed without consideration.
Therefore: No outward GST ≠ No GST cost.
This is the first trap every FMCG tax team should identify.
2. BOGO: “FREE” Does Not Make It a Free Sample
Consider: Buy 1 Soap, Get 1 Soap Free
or even: Buy Toothpaste, Get Toothbrush Free
CBIC has specifically clarified that a BOGO offer is not an individual supply of one paid item plus one independently supplied free item.
It is, at best, two or more supplies for a single price.
Its taxability therefore depends on whether the arrangement is a composite supply or mixed supply, with Section 8 determining the tax treatment.
The practical distinction
Free Sample
→ No consideration
→ Examine Section 17(5)(h)
BOGO
→ Single promotional consideration
→ Analyse the entire transaction
Do not let the word “FREE” in the advertisement determine the GST treatment.
3. DIFFERENT PRODUCTS: The Highest-Rate Trap
This is where a seemingly attractive promotion can become expensive.
For example:
Shampoo + Conditioner
Soap + Handwash
Biscuits + Beverage
Festival Hamper containing multiple products
The first question is:
Composite Supply or Mixed Supply?
If it is a composite supply, the principal supply determines the rate.
If it is a mixed supply, the highest applicable rate can apply to the entire supply.
Therefore:
Different products do not automatically mean mixed supply.
The statutory tests must be applied to determine whether the products are naturally bundled.
This distinction is specifically recognised in CBIC's clarification on promotional schemes.
4. “20% EXTRA FREE” Is Not Automatically a Free Supply
Consider: 100 ml + 20 ml FREE
The word FREE does not by itself decide the tax treatment.
The real question is: Is the additional quantity part of the same supply for the same consideration, or is there a separate supply?
This requires looking at the commercial structure, packaging, pricing, invoice and actual transaction together.
The rule:
Never classify a promotion from its advertisement alone.
The economic substance of the transaction must drive the GST analysis.
5. FREE GIFTS: The ITC Cost Often Gets Missed
FMCG companies commonly distribute:
- T-shirts
- Caps
- Bags
- Watches
- Gift hampers
- Promotional merchandise
If goods are genuinely disposed of by way of gift, Section 17(5)(h) becomes critical.
The accounting entry may simply say:
Marketing / Promotion Expense
But accounting nomenclature does not determine GST.
Ask first: Is this a genuine gift? Or is it:
a taxable business transfer / part of a commercial arrangement?
That distinction can materially change the GST treatment.
6. FREE FRIDGE / DISPLAY RACK: Who Owns It?
This is a classic FMCG blind spot.
A beverage company may place a branded refrigerator at a retailer.
But two very different situations can exist:
Returnable
Company retains ownership.
Permanently transferred
Retailer becomes owner.
A permanent transfer of a business asset on which ITC has been availed can fall within Schedule I, making the transaction potentially taxable even without consideration.
Therefore:
For promotional assets, the first question is not “Is it free?”—it is “Who owns it after the promotion?”
That single question can completely change the GST analysis.
7. EXPIRED / DESTROYED STOCK: The Forgotten ITC Leakage
FMCG businesses regularly deal with:
Expiry | Damage | Recall | Obsolescence | Destruction | Write-off
Section 17(5)(h) specifically covers goods lost, stolen, destroyed or written off.
But the practical risk is bigger than the reversal itself.
Can the company prove:
- what goods were destroyed?
- which batches were affected?
- when were they destroyed?
- who approved the write-off?
- what ITC was attributable?
- was the reversal correctly made?
GST records themselves require stock records covering goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Professional point:
A write-off without an audit trail is an invitation to a dispute.
The Ultimate “FREE” Test
Before Marketing launches any promotion, Tax should answer just 6 questions:
1. WHAT?
What exactly is being supplied?
2. CONSIDERATION?
Is there consideration? If yes, what is the customer actually paying for?
3. BUNDLE?
Are multiple products being supplied together?
4. CLASSIFICATION?
Composite supply or mixed supply?
5. ITC?
Does Section 17(5) restrict the credit?
6. OWNERSHIP?
For promotional assets, who owns them after the transaction?
The CFO's 30-Second GST Checklist
FREE SAMPLE
No outward GST → ITC risk
BOGO
Not a free sample → analyse the whole transaction
DIFFERENT PRODUCTS
Composite/Mixed Supply test
EXTRA QUANTITY
Look at the actual supply—not the word “FREE”
GIFT
Section 17(5)(h) check
PROMOTIONAL ASSET
Ownership check
EXPIRED / DESTROYED STOCK
ITC + documentation check
The Real Business Cost
Most marketing teams calculate:
Promotion Cost = Product Cost + Advertising Cost
A CFO should look at:
Tax-Adjusted Promotion Cost
**Commercial Cost
- Blocked ITC
- Unrecoverable GST
- Compliance Cost**
That is the number that should be compared with the incremental contribution generated by the campaign.
A promotion that looks profitable before GST can become far less attractive after its tax cost is recognised.
The One Rule Worth Remembering
FREE is not a GST category.
A free sample, BOGO, extra quantity, gift, mixed-supply hamper and promotional asset can all look similar in a marketing presentation—and yet have very different GST consequences.
So before approving any “FREE” scheme:
SUPPLY → CONSIDERATION → BUNDLING → RATE → ITC → OWNERSHIP
Get these six right, and most promotional GST surprises disappear.
Final Takeaway
The question should never be:
“Is it free?”
It should be:
“What is the legal and economic character of the entire transaction?”
For an FMCG business, promotional design is tax design.
