Businesses routinely offer sales promotion schemes to expand distribution networks and launch consumer products. Corporate gifting during festivals, physician samples in pharmaceutical industries, dealer incentive trips, and bundle offers represent common commercial practices. However, claiming input tax credit on promotional purchases requires careful analysis under GST law. For related analysis of sample goods, read our post on ITC on free goods and samples, and explore promotional bundling rules in our guide to ITC on promotional items and buy-one-get-one offers.
Statutory restriction under Section 17(5)(h) of the CGST Act
Section 17(5)(h) sets out a specific statutory embargo on claiming input tax credit. It stipulates that input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. The legal provision is published on the official repository at Section 17, CGST Act.
The core legislative intent behind Section 17(5)(h) rests on the basic structure of value added tax. When outward supplies do not incur output tax liability because they are given away without consideration, input tax credit incurred on inward procurement must either not be availed or must be reversed. Procedural clarification and return filing guidance are maintained on the GSTN Tutorial Portal and the main portal at the GST Common Portal.
Common audit trigger: Booking purchases of gold coins, consumer electronics, or gift hampers under marketing expenses in the profit and loss statement while claiming full input tax credit in Form GSTR-3B. Audit teams reconcile ledger expense heads against Table 4(B) reversals.
CBIC Circular No. 92/11/2019-GST clarifications
To resolve industry disputes regarding marketing campaigns, the Central Board of Indirect Taxes and Customs issued Circular No. 92/11/2019-GST clarifying four common promotional practices:
- Free samples and gifts: Samples distributed to doctors or festival gifts distributed to dealers without consideration do not constitute a supply under Section 7(1)(a) since there is no consideration. Therefore, no output tax is payable. Consequently, input tax credit on inputs, input services, or capital goods used in such gifts or samples is blocked under Section 17(5)(h).
- Buy One Get One Free (BOGO) offers: Promotional schemes offering an extra item without separate payment (such as buy one shirt and get another shirt free) are not true free supplies. In commercial reality, the customer pays a single consolidated consideration for two products. The transaction represents a supply of two goods for the price of one, classified as a composite supply or mixed supply under Section 8. Therefore, input tax credit on the procurement of both products remains fully admissible.
- Discounts including staggered discounts: Staggered discounts (such as 10 percent discount on purchases exceeding 100 units and 20 percent on purchases exceeding 200 units) offered through the tax invoice satisfy Section 15(3)(a). Full input tax credit is admissible to the supplier, and output tax is paid on the net value.
- Secondary discounts: Discounts granted after sales through financial or commercial credit notes do not reduce outward taxable turnover under Section 15(3)(b) unless agreed upon before the supply and linked to specific invoices. Crucially, the Circular clarifies that secondary discounts do not require the supplier or buyer to reverse input tax credit on the underlying goods.
Related party gifts and the Schedule I threshold
While gifts to external commercial partners without consideration fall under the Section 17(5)(h) blockage, gifts to related persons follow Schedule I of the CGST Act:
- Employee gifts: Under the proviso to Entry 2 of Schedule I, gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services. If the gift value exceeds ₹50,000 per employee, the entire value is treated as a deemed supply liable to output tax.
- Distinct persons: Branch transfers or transfers between distinct registrations of the same legal entity without consideration represent supplies under Schedule I Entry 2, with input tax credit availability governed by Rule 28 valuation rules.
Marketing collateral vs gifts: Display stands, hoardings, branded banners, and point-of-sale display racks supplied to dealers with a contractual obligation to display company products are marketing assets rather than gifts. Input tax credit on such brand display assets is admissible because they are used directly in the course or furtherance of business.
Accounting entries and Form GSTR-3B reporting
When goods on which input tax credit was originally claimed are subsequently distributed as gifts or free samples, an accountant must reverse the proportionate input credit. Under current reporting norms, taxpayers should report the credit under Table 4(A) and simultaneously report the permanent reversal under Table 4(B)(1) (as ineligible credit under Section 17(5)). This reporting preserves a transparent audit trail matching your financial ledgers.
Worked numerical example: promotional campaign accounting and ITC reconciliation
Consider Zenith Healthcare Limited, a manufacturer in Hyderabad. In September 2026, the company incurred expenses across four marketing initiatives to launch a nutrition product.
| Promotional Activity | Procurement Cost | GST Incurred (18%) | Statutory Classification | ITC Eligibility Status |
|---|---|---|---|---|
| Physician free sample packs | ₹5,00,000 | ₹90,000 | Disposed of as sample without price | Blocked under Section 17(5)(h); reverse ₹90,000 |
| BOGO retail offer stock | ₹12,00,000 | ₹2,16,000 | Two items sold for single combined price | Fully eligible; no reversal required |
| Distributor festival hampers | ₹3,00,000 | ₹54,000 | Gift without consideration | Blocked under Section 17(5)(h); reverse ₹54,000 |
| Branded metal display racks for clinics | ₹4,00,000 | ₹72,000 | Marketing assets used for business promotion | Fully eligible; outward business asset |
Out of total input tax credit of ₹4,32,000 incurred across these four promotional campaigns, Zenith Healthcare Limited successfully claimed ₹2,88,000 (from the BOGO units and clinic display racks) while permanently reversing ₹1,44,000 in Table 4(B)(1) of Form GSTR-3B. This precise classification eliminated litigation risk during subsequent departmental audits.
Frequently asked questions
Is input tax credit available on goods distributed as free samples or gifts?
No. Under Section 17(5)(h) of the CGST Act and Circular No. 92/11/2019-GST, input tax credit is blocked on goods disposed of by way of gift or free samples without consideration, because such distribution does not constitute a taxable outward supply.
How is input tax credit treated under Buy One Get One Free offers?
Under Circular No. 92/11/2019-GST, Buy One Get One Free offers are not free supplies. They are treated as supplying two goods for a single combined price, classified as composite or mixed supplies, meaning full input tax credit on inputs and input services used for both goods is admissible.
Are gifts given to employees subject to GST or input tax credit blockage?
Gifts given to an employee by an employer exceeding Rs 50,000 in value in a financial year are treated as supplies between related persons under Schedule I and are subject to GST. Where GST is paid on such outward supply, input tax credit on the procurement is available.
Where should input tax credit on free samples be reversed in Form GSTR-3B?
Blocked input tax credit on free samples and gifts should be reported under Table 4(B)(1) as an ineligible reversal under Section 17(5), ensuring the ineligible credit does not enter the electronic credit ledger.
Reconcile promotional inward supplies against GSTR-2B
Before applying statutory reversals for promotional gifts or free samples, verify that your vendors correctly uploaded invoices to Form GSTR-2B. Match your purchase ledgers with portal data in seconds. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 18 October 2026. Sources: Section 17, CGST Act, GSTN Tutorial Portal, GST Common Portal.