Free Samples

 Free Samples

Free Samples are products given to consumers to try before purchasing. Providing free or sample products is a tried and tested marketing method used by various industries in India such as pharmaceuticals, FMCG, etc.

For example, buy 3 and get 1 Soap free or 1 Garment free on purchase of 3 Garments or distribution of free samples to distributors, agents, customers, doctors, etc.

When does a product qualify as a free sample?

To qualify as a free sample, a product normally possesses the following features:

a) Distributed free of cost i.e., without any consideration.

b) Are marked NOT FOR SALE and normally no MRP is printed.

GST is applicable when a transaction involves the supply of goods/services for consideration. Goods or services that are supplied free of cost (without any consideration) cannot be treated as ‘supply’ as per Schedule I of the CGST Act, 2017 except on activities specifically mentioned on which GST needs to be charged even when supplied without consideration. Section 17(5)(h) of the CGST Act, 2017 restricts ITC on goods disposed of by way of gift or free samples. Thus, ITC has to be reversed on goods distributed as free samples.

Output Tax Payment and availment of credit to a certain extent depend on the taxability at the time of supply of such free samples / free supplies. The same has been summarized below:

CONDITION	OUTPUT TAX TREATMENT	ITC TREATMENT
Goods manufactured as free samples and then distributed	No output tax payable	ITC to be reversed
Goods manufactured as normal goods and then transferred as free samples	No output tax payable	ITC to be reversed
Goods manufactured as free samples and then distributed to RELATED PARTY	Output tax payable	ITC allowed
Free supply i.e., without any consideration	No output tax payable	ITC to be reversed
Buy one get one free offer	Output tax payable on assessable value	ITC allowed

 

Which Activities are Treated as Supply Even If Made Without Consideration?

Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. This is not applicable when ITC was not availed on such assets.

Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.

By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or.

If the agent is working on a commission basis and does not undertake goods, then there is no need to pay GST on goods, but the agent needs to discharge GST on the commission earned.

Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

Further, as per Circular No. 92/11/2019 – GST issued by the CBIC released on 07th March 2019, states that any goods or gifts provided under the category of gifts, samples, and other related categories without consideration, it shall not become categorized as ‘supply’ as per the Act. Hence, the input tax credit shall also not apply to those said goods.

From Schedule I reproduced above, it can be noted that the supply of free samples does not fall under the category of activities to be treated as supply even if made without consideration.

How to disclose free Samples supplies in the returns?

Since the free Samples are not supplies, there is no requirement of disclosing the same as outward supplies in the returns. The credit relating to the same can be disclosed in Table 4 of Form GSTR 3B as Ineligible ITC under Section 17(5) or Credit Reversal under “Others” if credit was already availed.

Export of Service

 Export of Service

Export of Services:

• Section 16 of the IGST Act places export of goods and services on the same footing; Export of services shall be treated as zero rated supply.

• The supplier can either export services after paying IGST and claim refund or can export services without payment of IGST under bond or under letter of undertaking.

“Export of Services” as defined under Section 2 (6) of IGST Act, 2017 means the supply of any service, when –

• the supplier of service is located in India;

• the recipient of service is located outside India;

• the place of supply of service is outside India;

• the payment for such service has been received by the supplier of service in convertible foreign exchange; and

• the supplier of service and the recipient of service are not merely establishments of a distinct person.

Anomaly in definition of export of services: Two conditions have been imposed in the definition of export of services which shall create unnecessary hardship to the service exporters.

1. The receipt of payment in convertible foreign exchange. No such conditions are there in case of export of goods.

2. It says that supplier of service and recipient of service must not be merely distinct persons. It is like saying that if a development centre of TCS in India is supplying services to TCS in some foreign countries, it shall not be treated as export. No such condition is there in case of goods. If Suzuki export goods to Suzuki outside India, it is very well an export.

Place of Supply for Export of services

• The default rule for place of supply (export of service) is the location of the service recipient if the address of the recipient is available.

• exporters must ensure that the address of service recipient can be presented before the authorities on request.

• Information Technology software, software development, BPO operations, software consultancy, etc. has been declared as service, Place of supply of software shall always be the location of the recipient.

• Apart from these, this rule will also apply to other services like software support/ maintenance and intermediary services as there are no exceptions under GST.

Authority on advanced ruling

 Authority on advanced ruling

Section 97: Application for advance ruling

1. An applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and manner and accompanied by such fee as may be prescribed, stating the question on which the advance ruling is sought.

2. The question on which the advance ruling is sought under this Act, shall be in respect of,––

(a) classification of any goods or services or both;

(b) applicability of a notification issued under the provisions of this Act;

(c) determination of time and value of supply of goods or services or both;

(d) admissibility of input tax credit of tax paid or deemed to have been paid;

(e) determination of the liability to pay tax on any goods or services or both;

(f) whether applicant is required to be registered;

(g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.

Section 98: Procedure on receipt of application

1. On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the concerned officer and, if necessary, call upon him to furnish the relevant records:

Provided that where any records have been called for by the Authority in any case, such records shall, as soon as possible, be returned to the said concerned officer.

2. The Authority may, after examining the application and the records called for and after hearing the applicant or his authorised representative and the concerned officer or his authorised representative, by order, either admit or reject the application:

Provided that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act:

Provided further that no application shall be rejected under this sub-section

unless an opportunity of hearing has been given to the applicant:

Provided also that where the application is rejected, the reasons for such

rejection shall be specified in the order.

3. A copy of every order made under sub-section (2) shall be sent to the applicant and to the concerned officer.

4. Where an application is admitted under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority and after providing an opportunity of being heard to the applicant or his authorised representative as well as to the concerned officer or his authorised representative, pronounce its advance ruling on the question specified in the application.

5. Where the members of the Authority differ on any question on which the advance ruling is sought, they shall state the point or points on which they differ and make a reference to the Appellate Authority for hearing and decision on such question.

6. The Authority shall pronounce its advance ruling in writing within ninety days from the date of receipt of application.

7. A copy of the advance ruling pronounced by the Authority duly signed by the members and certified in such manner as may be prescribed shall be sent to the applicant, the concerned officer and the jurisdictional officer after such pronouncement.

 

Scrutiny of returns under GST

 Scrutiny of returns under GST

Section 61 of CGST Act, 2017 contains the provisions of scrutiny of GST returns which empowers proper officer to scrutinize the return and related particulars furnished by the taxable person to verify the correctness of the return and inform him of the discrepancies noticed, if any, in a manner as maybe prescribed. Rule 99 of CGST Rules, 2017 provides for manner of scrutiny of returns.

 

Statutory provision for Scrutiny of Returns (Section 61)

 

(1) The proper officer may scrutinize the return and related particulars furnished by the registered person to verify the correctness of the return and inform him of the discrepancies noticed, if any, in such manner as may be prescribed and seek his explanation thereto.

(2) In case the explanation is found acceptable, the registered person shall be informed accordingly, and no further action shall be taken in this regard.

(3) In case no satisfactory explanation is furnished within a period of thirty days of being informed by the proper officer or such further period as may be permitted by him or where the registered person, after accepting the discrepancies, fails to take the corrective measure in his return for the month in which the discrepancy is accepted, the proper officer may initiate appropriate action including those under section 65 or section 66 or section 67, or proceed to determine the tax and other dues under section 73 or section 74.

 

Gist of provisions of section 61 of CGST Act, 2017

·       The proper officer can scrutinize the return to verify its correctness.

·       It is a non-compulsory pre-adjudication process.

·       In simple words, it is not mandatory for the officer to scrutinize return.

·       Scrutiny of returns is not a legal or judicial proceeding, i.e., no order can be passed.

·       The officer will ask for explanations on discrepancies noticed.

·       The proper officer may issue SCN, if required.

·       Department can select returns for verification – Can seek explanation for discrepancy detected

·       GST officers can scrutinize a GST return and related particulars furnished by the registered person to verify the correctness of the return.

·       In case of any discrepancies noticed by the officer, he/she would inform the same to the registered person and seek his explanation on the same.

 

On the basis of the explanations received from the registered person, the officer can take following actions:

 

If the explanation is satisfactory, officer will inform about the same to the registered person and no further action taken.

 

If the explanation provided is not satisfactory or the registered person has failed to take corrective measures after accepting the discrepancies, proper officer to initiate appropriate action: Conducting audit of registered person,

conducting special audit, inspect and search the place of business of registered person, or initiate demand and recovery provisions.

 

What is meant by scrutiny has not been defined in GST law. Though, scrutiny cannot be considered as detailed and independent as of audit, scrutiny implies verification of correctness of information submitted in the returns by the taxpayers. It is basically a scrutiny of information submitted, its timeliness, its authentic accuracy and corroborative verification from other documents.

 

The scrutiny of returns could be manual, desk review or an online evaluation. The scrutiny of returns becomes important in an era of self-assessment where the need for a strong compliance mechanism cannot be over emphasized. The person who does the scrutiny is called scrutineer and the process is called scrutiny or to scrutinize

 

When any return is selected for scrutiny, the proper officer verifies the information with reference to the information available with him. In case of observance of any discrepancy, to issue notice to the taxable person and seek his explanation to the discrepancy observed by him.

 

There could be following different scenarios in response to such notice received from proper officer, viz

 

(a) The taxable person accepts the discrepancy, deposits the shortfall in the payment of tax along with interest thereon and informs to proper officer.

 

(b) The taxable person submits the explanation to the points raised by proper officer in his reply, the explanation is found to be acceptable to proper officer, the proper officer closes the matter and informs the taxable person.

 

(c) The explanation is not found to be acceptable or after accepting the discrepancy, the taxable person fails to deposit the tax with interest, the proper officer takes the following actions.

·       Orders for audit by tax authorities – section 65 of the CGST Act, 2017

·       Orders for special audit – section 66 of the CGST Act, 2017

·       Initiates inspection, search, or seizure – section 67 of the CGST Act, 2017

·       Determination of tax not paid or short paid – section 73 of the CGST Act, 2017

·       Determination of tax not paid or short paid by reason of fraud or wilful misstatement –section 74 of the CGST Act, 2017

 

 

Time limit for reply to Notice

 

The notice of discrepancy issued by proper office in respect of scrutiny of returns has to be replied within such time not exceeding 30 days from date of service of notice or such further period as may be permitted by proper officer

Applicable Rules

Rule 99 of the CGST Rules, 2017, provide for manner and procedure for provisional assessment undersection 61 of the CGST Act, 2017 which inter-alia, contain the following:

rule	Providing for
1	Provides for initiating scrutiny of returns furnished by registered person, based on information available; issue notice on finding discrepancies, seeking explanation, quantifying the liability and extending the period of 30 days if deemed fit.
2	Provides the manner in which registered person may either accept the discrepancy or furnish an explanation to the proper officer
3	Manner in which proper officer should send the intimation to the registered person in case the information / explanation is, acceptable

Applicable Forms

According to rule 99 of CGST Rules, 2017, following forms are required to be used for various purposes and are to be filed online

S.No.	Form No.	Purpose
1	GSTASMT-10	Issuance of notice by proper officer on noticing discrepancies on return
2	GSTASMT-11	Response by registered person against ASMT-10 by way of accepting the discrepancy or submitting explanation
3	GSTASMT-12	Intimation by proper officer on finding explanations satisfactory

 

GST on RCM - A Simple View

 GST on RCM -  A Simple View

• ·   If you have RCM liability even, then your threshold limit is less than eligible turnover you must register under gst as per Sec 24 of CGST Act 2017.
• ·       RCM covered under CGST Act 2017 – under sec 9(3), 9(4) & 9(5)
• ·  In case of a project developer or construction of apartment by the developer, 80% of inputs and input services [other than capital goods, TDR/JDA, FSI, long-term lease (premium) shall be purchased from registered persons. On shortfall of purchases from 80% tax shall be paid by the builder @18% on RCM basis. However, Tax on cement purchased from unregistered person shall be paid @28% under RCM, and on capital goods under RCM at applicable rates in terms of Section 9(4) the CGST Act,2017
• ·  Renting of motor vehicle There are only two rates applicable on the service of renting of vehicles, 5% with limited ITC and 12% with full ITC.

·       Goods –

ü cashew nuts not shelled or peeled,

ü Beedi wrapper leaves,

ü tobacco leaves,

ü Mentha piperita,

ü silk yarn,

ü raw cotton,

ü supply of lottery,

ü seized vehicle sold by government,

·       Services –

ü GTA,

ü Individual advocate,

ü Arbitral Tribunal,

ü sponsorship service,

ü services supplied by government,

ü renting of residential or commercial to registered person,

ü Transfer of Development right or floor space index,

ü long term lease of land (over 30 years),

ü Payment to Company director,

ü Insurance agent service,

ü recovery agent service,

ü copy right service to composer, photographer or artist,

ü members of overseeing committee constituted by RBI,

ü Direct selling agents for banking or NBFC sector,

ü Business facilitator,

ü An agent of business correspondent,  

ü renting of motor vehicle designed to carry passengers to body corporate,

ü service of lending securities,

ü services from Non-taxable territory to taxable territory,

ü Security services,

ü Unregistered supply through Electronic Commerce Operators

GST on Renting of immovable property

GST on Renting of immovable property

Let us understand the recent changes with respect to Renting of Immovable property. The service is mainly divided into two categories one is Commercial property and other being Residential property.

 

Renting of Commercial property: This service has always been taxable under forward charge meaning thereby Supplier of Service (i.e., Landlord) has to charge GST on the amount of rent. GST will not be leviable only in case where landlord is not registered. (His aggregate turnover is below the threshold limit of 20 lacs)

 

Renting of Residential Property for Residential use: Till 17th July ,2022 this service was exempt. However, from 18.07.22 there is no blanket exemption.

 

Renting of Residential Property for Residential use to a business entity registered under GST:

Becomes taxable with effect from 18th July,2022. Service Provider is not liable to charge gst under forward charge, but Service receiver will pay gst under Reverse Charge Mechanism (RCM). Even if a business entity

uses it for residential purpose for its employees/ Directors and debits the expenditure in its books of accounts then also it is liable to charge GST under RCM.

 

Renting of Residential Property for Residential use to a GST registered Proprietor for his personal use: Its exempt. So, no liability/compliances for Service for Landlord and Tenant both. Assuming that rent is not claimed as expenditure in his books of accounts. So, it can be said that Renting of Residential property for residential use of un-registered person or personal use of registered proprietor will only be exempt from forward charge or reverse charge.

 

Taxability of Hotel Accommodation:

Up to 18.07.22: Value of Accommodation per unit per day below Rs.1000/- was exempt.

From 18.07.22: Exemption has been removed. Now any Hotel accommodation up to Rs.7500/- will be taxable

@ 12% and above Rs.7500/- will be taxable @ 18% (eligible for ITC)

 

Hostel Accommodation:

A Business entity providing Hostel Services to students: If Hostel is meant for short term stays with various facilities like Food, Internet, Laundry, Reception etc. then the service would be leviable to gst @12%. However, if it’s for long term stays with rental agreement then it would be exempt.

A business entity providing Hostel services to any Educational Institution / University: If service receiver is unregistered then its exempt. If Educational Institution / University is registered, then from 18.07.22 it has to pay tax under RCM @18%.

 

Educational Institution providing hostel services to students: Exempt

Commercial Coaching Institutes providing Hostel services to students: If service is bundled with Coaching, then its taxable @18%. If Hostel facility is separate and for short term (say less than 1 year) then taxable @12%.

If Hostel facility is for long term with proper rental agreement and not bundled with coaching service, then its exempt.

Perquisites by employer to employees – on contractual agreement

 

Perquisites by employer to employees – on contractual agreement

CGST Circular No. 172/04/2022-GST on 6th July 2022

One of the critical matters was the taxation of perquisites that an employer gives to its employees as per a contractual agreement.

·       No GST applies on such perks where there is a contract in place for employment, and such perquisites are mentioned.

·       The Circular explains that this is also in line with the Schedule III of the CGST Act.

·       It says that any services by an employee to the employer during employment are out of the scope of GST.

The same Circular further clarifies the interpretation of certain items under Section 17(5) of the CGST Act. First of all, the proviso given under clause (b) of Section 17(5) keeping obligatory supplies by the employer to employees eligible for input tax credit claims applies to the entire clause (b). (Foods & beverages, outdoor catering, beauty treatment, health insurance, cosmetic & plastic surgery.)

In other words, the items listed under clause (b) are ineligible for tax credit claims except where it is to be provided by the employer to employees as per any law or rule in force. 

Hence, the input tax credit is available to the employer if such employer expends on food, outdoor catering, beauty treatment, health services, leasing or renting of passenger cabs or aircraft, life or health insurance policies, club membership, home travel concession, or leave travel benefits in compliance with law or rules provided to employees. 

Any free beverages, journal subscriptions, canteen facilities, free parking space, and group medical insurance given to employees as per contract will not attract GST.

It is not an exhaustive list. Hence, any such perks transacted between the employer and employee will not attract GST if given under the employment agreement. 

Earlier, many experts opined those employers and employee are related parties. Accordingly, there were views that the prerequisite underemployment should also attract GST on the fair market value.

The clarification brings the matter to a conclusion. It is imperative to note that the contractual agreement for employment would include HR policies as well.