Retailers and distributors running festive campaigns often face confusion when balancing promotional inward purchases against outward sales. An accountant examining the monthly purchase register may see five vendor invoices for promotional stock, but wonder which lines require reversal in Form GSTR-3B. Knowing how the Central Board of Indirect Taxes and Customs distinguishes pure gifts from package discounts protects your business from sudden demand notices under Form GST DRC-01.
The statutory boundary under Section 17(5)(h) and Section 16
Section 16(1) of the CGST Act establishes that registered persons may claim credit of input tax on goods and services used in the course or furtherance of business. You can review the statutory framework in our overview of ITC claim rules under GST. However, this entitlement is overridden by Section 17(5). Under Section 17(5)(h) of the CGST Act, input tax credit is blocked on:
“goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples” Section 17(5)(h), CGST Act
When goods are given away without consideration, the transfer does not qualify as a supply under Section 7(1)(a). Because no output tax is collected on such gifts, the law prevents you from retaining ITC on their acquisition or manufacture. If your business gives away free items to dealers or customers, you must identify and reverse that credit. For a comprehensive look at other blocked categories like passenger vehicles and food catering, refer to our detailed guide on blocked credit under GST Section 17(5).
Common mistake: Treating promotional expenses as fully creditable solely because they boost business turnover. Physical goods given away as complimentary trade gifts remain strictly blocked under Section 17(5)(h), regardless of marketing intent.
CBIC Circular 92/11/2019 clarifications for sales promotions
To end disputes across retail and FMCG sectors, the government issued CBIC Circular No. 92/11/2019-GST. The circular examines four distinct commercial schemes:
- Free samples and gifts: Samples supplied free of cost without consideration are not a supply under Section 7(1)(a). The supplier cannot avail ITC on inputs, input services, or capital goods to the extent used for these free items. If already claimed, the credit must be reversed. Our practical analysis of ITC on free goods sample explains the exact reversal steps.
- Buy One Get One free offers: In a BOGO offer, two units are provided, but a single price is charged. The circular clarifies that this is not a supply of free goods, but a supply of two goods for the price of one. Full ITC is admissible on all inputs, input services, and capital goods used.
- Discounts including Buy More Save More: Staggered discounts like buying two shirts for 10% off or three for 20% off are volume discounts. These discounts are excluded from taxable value if shown on the invoice or documented in prior agreements under Section 15(3). The supplier retains full ITC.
- Secondary discounts: Post-sale discounts that do not meet the terms of Section 15(3)(b) cannot reduce outward GST liability, but they do not require ITC reversal by the supplier.
Rule on rate determination: If a BOGO bundle combines different items, taxability follows Section 8 of the CGST Act. Naturally bundled items are taxed as a composite supply at the principal rate. Items that are not naturally bundled form a mixed supply, taxable at the highest rate in the combination.
Valuation rules under Section 15 and tax invoice pricing
Structuring your tax invoice correctly ensures that tax officers recognize your promotional scheme as a commercial bundle rather than an unapproved gift. Section 15(1) states that the value of a supply is the transaction value, which is the price actually paid or payable. When structuring a BOGO scheme, follow these two standard billing methods:
- Single line item description: The invoice displays a package description, such as Combo Pack containing 1 Shirt and 1 Trouser, with quantity 1 and taxable value ₹2,000, charging the applicable GST on that single figure.
- Itemised lines with 100% line discount: The invoice lists Shirt A at ₹2,000 and Shirt B at ₹2,000, followed by an immediate trade discount line of ₹2,000 under Section 15(3)(a). The net taxable value is ₹2,000.
Both methods establish that consideration was received for the entire delivery, preserving your input tax credit across all units supplied.
Worked example: monthly inward invoices and ITC eligibility
Consider Radhika Apparel Private Limited, an apparel distributor in Ahmedabad. In September 2026, the company receives five vendor invoices. All five invoices appear in Form GSTR-2B generated on 14 October 2026. The finance team audits each invoice before preparing Form GSTR-3B for filing by 20 October 2026.
| Invoice item | Taxable value | GST charged | Commercial use | Eligible ITC |
|---|---|---|---|---|
| Commercial garments for resale | ₹2,00,000 | ₹24,000 | Sold in regular wholesale trade | ₹24,000 |
| Stock for Buy One Get One promotion | ₹1,20,000 | ₹14,400 | Sold under festive BOGO campaign | ₹14,400 |
| Volume discount stock (staggered pricing) | ₹80,000 | ₹9,600 | Sold under Buy 3 Get 20% Off scheme | ₹9,600 |
| Free promotional trade samples | ₹50,000 | ₹6,000 | Distributed to retail shopkeepers free | ₹0 |
| Corporate festival sweets gift boxes | ₹20,000 | ₹1,000 | Gifted to trade association directors | ₹0 |
| Total | ₹4,70,000 | ₹55,000 | ₹48,000 |
Total GST reflected in GSTR-2B across the five invoices is ₹55,000. Two lines represent items distributed without consideration: promotional trade samples with ₹6,000 GST and festival gift boxes with ₹1,000 GST. Both lines are blocked under Section 17(5)(h), totaling ₹7,000 in blocked credit. In contrast, the BOGO stock with ₹14,400 GST and volume discount stock with ₹9,600 GST remain fully eligible under Circular 92. Net eligible ITC is ₹55,000 minus ₹7,000, giving ₹48,000 to claim in Table 4(C) of Form GSTR-3B.
Notice risk: Over-claiming the full ₹55,000 without reversing the ₹7,000 blocked credit results in recovery proceedings under Section 73 or 74, along with 18% annual interest under Section 50(3).
Accounting entries for promotional schemes and reversals
In practice, bookkeeping entries in Tally Prime or your ERP must distinguish between creditable package promotions and non-creditable free gifts:
1. Purchase of stock for Buy One Get One offers
2. Purchase and reversal for free trade samples
Reporting promotional ITC and reversals in Form GSTR-3B
Taxpayers declare inward credits and reversals under Table 4 of Form GSTR-3B. The GST portal offers two workflows as detailed in the official GSTN GSTR-3B user manual:
- Gross auto-population with reversal: Retain the full GSTR-2B amount of ₹55,000 in Table 4(A)(5) (“All other ITC”), and enter the blocked amount of ₹7,000 in Table 4(B)(1) (“As per rules 38, 42 and 43 and section 17(5)”). The portal computes net ITC of ₹48,000 in Table 4(C).
- Net reporting in Table 4(A)(5): Edit Table 4(A)(5) downwards to report ₹48,000 directly. Because the figure is reduced, no portal warning or red highlight is generated.
Audit checklist for retail promotions
- Separate ledger codes: Create independent purchase ledgers for commercial trading stock, bundle promotion stock, and free sample giveaways.
- Invoice wording: Never print Zero Price or Free Item on a standalone sales invoice. State Buy 1 Get 1 with single consolidated package value or apply an item discount.
- Contract documentation: Preserve distributor agreements and promotional circulars establishing volume discount structures prior to supply.
- Monthly reconciliation: Reconcile dispatch dockets for free giveaways against purchase records to reverse blocked credit by the 20th of every month.
Related guides
- ITC reversal under Section 17(5)(d) for building and civil structure expenses
- ITC on free replacement warranty goods: Circular 195 explained
- ITC on promotional display racks, glow signs, and retail fixtures in FMCG modern trade
- Restaurant ITC blocked under GST 5 percent
- ITC on club, health and fitness centre corporate memberships
Frequently asked questions
Is input tax credit blocked on Buy One Get One free offers?
No. Circular 92/11/2019-GST clarifies that BOGO offers are not gifts. They represent two items supplied for a single consolidated price. Full input tax credit is admissible on inputs and input services used for both goods.
When must input tax credit on promotional items be reversed?
Input tax credit must be reversed under Section 17(5)(h) whenever items are distributed without consideration, such as physician samples or free gifts. The reversal is reported in Table 4(B)(1) of Form GSTR-3B.
How does GST apply if BOGO products attract different tax rates?
If the products are naturally bundled, they are taxed as a composite supply at the principal rate. If they are not naturally bundled, they are treated as a mixed supply under Section 8, and tax is charged at the highest rate among the items.
Do volume discounts reduce transaction value under Section 15(3)?
Yes. Staggered volume discounts reduce taxable value if established by agreement before or at supply, linked to relevant invoices, and proportionate ITC is reversed by the buyer.
Reconcile your inward invoices before reviewing blocked ITC
gstr2bmatch.in compares your purchase register with GSTR-2B in seconds, pinpointing matched, missing, and mismatched invoices with exact rupee figures. Because the tool identifies every valid inward invoice, accountants can quickly isolate sample batches and apply Section 17(5)(h) reversals before return filing. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 15 October 2026. Sources: Section 17(5)(h), CGST Act, CBIC Circular No. 92/11/2019-GST, GSTN GSTR-3B user guide.