GST Free Samples vs Buy-One-Get-One Offers: Separate Output Tax, ITC and Stock Quantities

Parcel packing and stock movement at warehouse

The word free does not decide the GST treatment

A genuine gift/sample supplied without consideration is ordinarily outside supply unless Schedule I applies; the related credit restriction must then be assessed. A buy-one-get-one promotion sold for a single price is different: it supplies multiple items for that consideration, and the appropriate supply classification determines tax. Do not automatically reverse half the ITC merely because advertising calls one of two items free.

The framework is set out in CBIC Circular 92/11/2019-GST dated 7 March 2019, parts A and B, read with CGST sections 7, 8, 15, 16 and 17(5)(h), and Schedule I. This article focuses on goods promotions; it does not treat cash discounts, employee compensation, loyalty points or every business incentive as the same arrangement.

Distinguish the existing credit restriction from the October 2026 proposal

The credit treatment in this guide explains section 17(5)(h) and parts A and B of Circular 92/11/2019-GST. At its meeting on 8 October 2026, the GST Council recommended amending section 17(5) to remove specified restrictions, including for free samples. A Council recommendation does not itself amend the Act or establish a commencement date. Any relaxation must be applied under the enacted amendment and its effective-date provisions. The sample-credit calculations below assume the cited restriction applies to the transactions; they do not calculate entitlement under a future amended provision. Check the transaction-date law before retaining or reversing credit.

Keep the output-tax and credit decisions separate

Part A explains that genuinely free samples ordinarily are not supplies, except Schedule I activities. It also explains the non-availability of ITC on inputs, input services and capital goods to the extent used for gifts/free samples distributed without consideration. Where the distribution is a supply because of Schedule I, the circular recognises ITC eligibility; the ordinary credit conditions and other restrictions still apply.

Part B explains that two goods for one price are not necessarily one paid good plus an independent free gift. ITC for the inputs, input services and capital goods used in such offers remains available subject to the applicable conditions. It does not follow that every bundle has one universal tax rate. The CGST Act text in ICAI’s April 2026 bare-law compilation contains the composite/mixed definitions and section 8: a composite supply follows its principal supply; a mixed supply follows the highest applicable rate.

Commercial arrangement	Supply/tax question	Credit question
Unconditional free sample	Is consideration absent and Schedule I inapplicable?	Identify attributable credit restricted by section 17(5)(h).
Two or more goods for a package price	Determine actual supply classification and package consideration.	No automatic free-item fraction reversal under the circular.
Naturally bundled composite supply	Identify principal supply on the actual facts.	Apply normal credit conditions and any other block.
Single-price mixed supply	Identify the highest applicable component rate.	The marketing label does not create a free-sample reversal.
No-consideration Schedule I transfer	Test the statutory relationship/activity and valuation.	Apply the circular’s exception and ordinary eligibility conditions.

Build one scheme register tied to stock and GST records

Before launch, record eligible recipients, consideration, contractual entitlement, goods/quantity, tax classification and the scheme’s approval. Reconcile dispatch quantities to invoices, delivery documents and stock. A zero-priced invoice line is not proof that goods are an independent free gift; equally, a payment elsewhere does not prove that an unrelated gift belongs to a paid bundle.

Trace directly attributable sample credit first and support any common-input allocation with the actual facts and applicable provisions. A sample register alone does not justify a universal turnover percentage for all common expenditure. Separate goods written off or destroyed from commercial promotions even though section 17(5)(h) may also be relevant.

Common errors before the return is finalised

Watch for output tax being omitted on a paid package, the highest-rate mixed-supply rule being replaced by arbitrary value splitting, blocked sample credit being left in the credit ledger, or a Schedule I transfer being treated as an ordinary free sample. Review current HSN, exemption, cess and rate notifications for actual products. Rates in the following fictional illustrations are assumed facts, not classifications of named products.

Worked illustrations

These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.

Illustrative example 1: Genuine free samples to unrelated recipients

A registered trader distributes 100 independently free samples to unrelated recipients, with no Schedule I activity. Each purchased unit costs ₹100 plus assumed GST ₹18; total cost ₹10,000 and attributable input tax ₹1,800. The distribution has no output supply on these facts, but the ₹1,800 credit is unavailable under the free-sample restriction. If already availed, assess the necessary reversal and any separate interest conditions.

Illustrative example 2: Two items sold for one package price

There are 100 promotional pairs, 200 identical units, sold at ₹1,000 per pair excluding GST. Assume the applicable supply rate is 18%. Taxable consideration is ₹1,00,000, output GST ₹18,000 and invoice total ₹1,18,000. Attributable otherwise-eligible inward credit is ₹14,000. There is no automatic ₹7,000 reversal for the second item solely because it was advertised as free.

Illustrative example 3: A mixed-supply package cannot be rate-split at will

Assume a ₹2,000 single-price package is legally a mixed supply of two taxable items with applicable rates 5% and 18%, with no exemption or cess. Section 8 makes tax ₹360 at 18%. An unsupported allocation of ₹800 at 5% and ₹1,200 at 18% would give ₹256, understating tax by ₹104. The assumed mixed-supply finding must be evidenced, not inferred from different rates alone.

Illustrative example 4: A genuine composite supply follows its principal supply

Independently assume a naturally bundled composite supply priced at ₹2,000 excluding GST, with its legally identified principal supply taxable at 5%. Tax is ₹100, even though an ancillary component supplied independently would be at an assumed 18%. The result depends on the composite-supply facts; it is not an option to select whichever bundle classification has less tax.

Illustrative example 5: Buy ten, get one: stock and consideration use different quantities

A scheme sells each eleven-unit pack for ₹1,000 excluding GST. Ten packs dispatch 110 units for ₹10,000 consideration. At an assumed 18% rate, output GST is ₹1,800. The stock register must remove 110 units, not 100; the paid package does not automatically turn the additional ten units into independent free samples for ITC reversal.

Illustrative example 6: A transfer between distinct registrations needs Schedule I review

Assume a no-consideration business stock transfer between distinct GST registrations of the same legal entity is covered by Schedule I, with a properly supported taxable value of ₹50,000 under the applicable valuation rule. At an assumed 18% rate, output tax is ₹9,000. Do not classify it as an ordinary non-supply free sample. The circular’s Schedule I credit treatment is subject to the normal recipient/supplier conditions; the ₹50,000 valuation is an assumed established fact, not a universal rule.

Illustrative example 7: Reconcile two promotional stock populations

A trader acquires 250 identical units at ₹100 plus ₹18 GST each: total input tax ₹4,500. Evidence identifies 100 units as genuinely free samples outside Schedule I and 150 as goods supplied in paid promotional packages. Direct unit attribution gives sample-related tax ₹1,800 and otherwise-eligible package-related tax ₹2,700. The latter remains subject to normal conditions. Do not reverse all ₹4,500 or keep it all merely because both dispatch populations share one campaign name.

Ten-step verification table

Step	Verification	Evidence to retain
1	Read the approved scheme and contractual entitlement.	Written offer, consideration and eligibility terms.
2	Identify actual recipients and relationships.	Recipient/GSTIN register and Schedule I assessment.
3	Separate genuine gifts from paid package supplies.	Order, invoice and delivery-document mapping.
4	Determine composite/mixed/other supply classification.	Product facts and reasoned classification memo.
5	Verify current product rates and exemptions.	HSN, notification and cess review.
6	Reconcile package consideration and output tax.	Invoice-level taxable value and tax calculation.
7	Trace sample-related inward credit.	Purchase/unit records and direct attribution.
8	Assess common costs and other credit restrictions.	Supported allocation and eligibility documents.
9	Reconcile all dispatched units to stock and returns.	Opening/receipt/dispatch/closing quantity bridge.
10	Approve the return treatment and preserve evidence.	Tax/credit reconciliation and review of reversals.

Sixteen practitioner FAQs

1. Is every advertised free item a free sample?

No. A paid package may supply multiple items for one consideration; examine the actual transaction.

2. Are genuine free samples always subject to output GST?

Ordinarily no consideration means no supply, but Schedule I can create a supply without consideration.

3. Can sample-related ITC remain merely because promotion benefits business?

The specific gift/free-sample restriction still requires assessment. Business purpose alone does not remove it. Apply the enacted law effective for the transaction; do not substitute the Council’s recommended relaxation for an operative amendment.

4. Must half the ITC be reversed on every buy-one-get-one sale?

No. The circular recognises paid offers as multiple items for consideration and allows credit subject to applicable conditions.

5. Does a single package price always mean mixed supply?

No. Test whether the arrangement is composite, mixed or otherwise classified based on the statutory conditions.

6. Can different tax rates alone establish a mixed supply?

No. Single-price and bundling facts, including whether it is a composite supply, need analysis.

7. Which rate applies to a genuine mixed supply?

Section 8 applies the highest applicable rate among the supplies, subject to the actual classifications and law.

8. Which rate applies to a genuine composite supply?

The composite supply is treated as the principal supply under section 8.

9. Can a zero-valued invoice line decide ITC eligibility?

No. The complete offer, payment and contractual relationship determine whether it is an independent gift or part of a paid package.

10. Are related-party transfers automatically ordinary free samples?

No. Schedule I and the applicable valuation rules may require output tax without consideration.

11. Does the Schedule I exception remove all other ITC conditions?

No. Apply normal eligibility requirements and other applicable blocks; the circular does not waive them.

12. How should purchased sample goods be traced?

Use identified units or batches and their attributable tax. Keep the purchase and distribution evidence together.

13. Can a turnover percentage allocate every common promotion cost?

Not automatically. Support the method with actual use and applicable credit provisions; do not invent a universal formula.

14. Is a damaged-stock write-off the same as a marketing sample?

No. Identify the actual event and records. Section 17(5)(h) can be relevant to both, but the supply and evidence analysis differ.

15. Can the example rates be used for actual soap or medicines?

No. They are assumed rates for fictional goods. Check current classification and notifications for the real product.

16. What is the best control before filing?

Reconcile scheme terms, dispatched quantities, consideration, output tax and retained/reversed input tax in one evidence-linked schedule.

Conclusion

Classify the commercial arrangement first, then reconcile output tax, attributable credit and stock quantities separately. A marketing label must not determine the return treatment.