GST on Free Supplies by the Customer

GST on Free Supplies

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GST on Free Supplies by the Customer

There is a confusion regarding whether GST is required to be paid on free supplies given by the customer. It is a very common practice existing in the market that certain materials are provided to the service provider or manufactures. In the service tax, customer provides some food to the caterers, or provides cement and steel to the work contractor in the construction of building.

For better understanding, we will take an example so that one should be able to understand clearly.

  • There is a contract between contractor and client. Contract price is Rs. 8cr where contractor has to incur all the expenditure. In this case, Government would be able to levy tax on total price i.e. Rs. 8cr.
  • In another case, client will provide cement & steel for construction and contract price is Rs. In this case, Government will get tax only on Rs. 5cr.

In the pre GST Era, any free material provided by the client is included in taxable value at the time of valuation and required to pay tax on it. This position is almost settled in all indirect taxes like Central Excise, VAT or service tax.Now in GST, it is levied at a specified rate on the value determined under section 15 of CGST Act,2017.

Whether GST should be paid or not on free supplies,firstlyone should know what is consideration under GST& provisions of the section 15 i.e. what is transaction value.

Definition of consideration:

Section 2(31) defines consideration which reads as follows:

“consideration” in relation to the supply of goods or services or both includes

– Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

 – The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.”

 

Thus, any consideration whether monetary or otherwise should have flown or should flow from the payer to the payee and should accrue to the benefit of the later. Further, the wordings of section 15(2)(b) of CGST Act, 2017 also does not make the ‘free supplies’ as taxable value

However, if it was initially agreed that supplier would incur the entire cost but the same was actually incurred by the recipient and adjusted in the payment, the value of ‘free supplies’ may have to be includible and liable for GST in such situation.

Recent clarification from Government:

Very recently Government has issued a circular no. 47/21/2018 – GST dated 08.06.2018 clarifying that the value of free supplies need not be added to the value of supply.

The relevant extract reads as follows:
Issue Clarification
Whether moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case? 1.1 Moulds and dies owned by the original equipment manufacturer (OEM) which are provided to a component manufacturer (the two not being related persons or distinct persons) on FOC basis does not constitute a supply as there is no consideration involved.

Further, since the moulds and dies are provided on FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of input tax credit availed on such moulds and dies by the OEM.

1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).

1.3 However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components.

In such cases, the OEM will be required to reverse the credit availed on such moulds/ dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business.

Conclusion:

As there is no specific provision for inclusion of such supplies in the GST law & also Government is issued clarification on it as above.There is not required to pay GST on the basis of above clarification.


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