Gifts to employees and free samples: when GST applies and when the credit is lost

It is festival season. You have ordered hampers for the whole team. Or you have a batch of product samples going to prospective customers. The invoices from your suppliers carry GST. Two questions follow.

First, do you now owe GST on the gift itself? Second, can you take input tax credit (the GST you paid on your purchases, set off against the GST you collect) on what you bought?

The answers are different for gifts to staff and for free samples. This article takes each in turn, using the words of the CGST Act, 2017 and the CGST Rules, 2017.

Two separate questions

Keep these apart, because people mix them up.

Question one: is giving the gift a "supply"? GST is charged on supplies. If a gift is a supply, you must account for output tax on it, as if you had sold it.

Question two: is input tax credit allowed on what you bought to give away? This is a different test, under section 17(5) of the CGST Act, 2017.

A gift can pass the first test (no GST to pay on the gift) and still fail the second (no credit on the purchase). That is exactly what happens with most free samples.

Gifts to employees: when is it a supply?

Section 7(1)(a), CGST Act 2017, says "supply" includes sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made "for a consideration" in the course or furtherance of business. A gift has no consideration. On this limb alone, a gift would fall outside GST.

But section 7(1)(c) adds "the activities specified in Schedule I, made or agreed to be made without a consideration". So the law pulls certain no-payment activities into GST on purpose.

Schedule I, para 2, CGST Act 2017, covers 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".

Is an employee a related person? Yes. The Explanation to section 15, CGST Act 2017, says persons are deemed to be "related persons" if "such persons are employer and employee" (section 15, Explanation, clause (a)(iii)).

So a gift from a business to its employee falls within para 2. It would be a supply even though nobody pays.

The ₹50,000 limit

Para 2 then carries a proviso (Schedule I, para 2, CGST Act 2017):

"Provided that 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 or both."

In plain words:

The limit is ₹50,000 in value in a financial year.
It applies to gifts "by an employer to an employee". Read it per employee, not for the whole team put together.
A gift within the limit is not a supply. No output GST on the gift.
The test runs on a financial year. Festival hampers in October and a bonus voucher in March of the same financial year count together.

The proviso leaves two things open:

It does not say whether, once a gift crosses ₹50,000, the whole value is treated as a supply or only the excess. The proviso says gifts "not exceeding" the limit are not supplies. It does not say what happens above it. Get your CA's view before you rely on either reading.
It does not define "gift" or say whether a cash gift or a gift voucher counts as goods or services. Do not assume. Ask your CA.

If the gift crosses ₹50,000: how is it valued?

Once a gift is a supply between related persons, value is not the "price paid", because no price was paid. Section 15(1), CGST Act 2017 uses the transaction value only where the parties are not related and the price is the sole consideration. For related persons, rule 28, CGST Rules 2017 applies. It says the value of supply between related persons shall:

(a) be the open market value of such supply;
(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality; and
(c) if neither can be determined, follow rule 30 or rule 31, in that order.

Keep the purchase invoice for the hamper, and a note of the open market price of the same item.

Services the employee provides to you

Do not confuse gifts with salary. Schedule III, para 1, CGST Act 2017 lists "services by an employee to the employer in the course of or in relation to his employment" as neither a supply of goods nor a supply of services (section 7(2)(a), CGST Act 2017). That covers the employee's work. It says nothing about gifts you give back. Gifts are tested under Schedule I, para 2, as above.

Free samples: is it a supply?

A free sample goes to a prospect, a dealer, a doctor, a journalist. These are usually not related persons. Section 7(1)(a) needs a consideration. Schedule I, para 2 needs related or distinct persons. On the words of section 7 and Schedule I, a plain free sample to an unrelated person is not caught by para 2.

Two cautions:

If the "free" sample is handed over as part of a paid deal, the consideration question changes. Do not treat a freebie packed with a paid order as an isolated gift without checking with a CA.
Schedule I, para 1 covers "permanent transfer or disposal of business assets where input tax credit has been availed on such assets". If you give away equipment or an asset on which you took credit, that para is the one to check.

Input tax credit: the real cost

Here is the part that costs money. Section 16(1), CGST Act 2017 lets a registered person take credit of input tax on supplies "used or intended to be used in the course or furtherance of his business".

Section 17(5) then overrides it. It opens: "Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following".

Two items in that list matter here (section 17(5), CGST Act 2017):

Clause (h): "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples".
Clause (g): "goods or services or both used for personal consumption".

Clause (h) is the one that answers our question. If you buy goods and dispose of them by way of gift or as free samples, there is no input tax credit on those goods. This holds even when the gift to the employee is below ₹50,000 and so is not a supply. Not being a supply does not restore the credit.

This applies to goods. Clause (h) speaks of "goods". It does not use the word "services". A service you buy to hand over as a gift is not named in clause (h). Whether credit is open for it depends on the rest of section 17(5) and section 16. Check with your CA.

Other clauses of section 17(5) can also bite on gifts of particular kinds, such as food and beverages or outdoor catering under clause (b)(i). Those are separate topics and we do not cover them here. This article stays with gifts and samples.

The timeline to keep in mind

There is no fixed filing date for a gift. The clock runs on the credit:

Decide at purchase, not at distribution. When you buy goods meant for gifts or samples, do not take the credit on that invoice at all.
If you bought goods for resale or use and later gift them out of stock, credit on them is not available under clause (h). Your CA will tell you how to correct the credit already taken and show it in your GST return. We have not set out the return mechanics here.
For the ₹50,000 test, the year is the financial year. Track gifts per employee across the whole financial year.

Step by step

List what you gave. For each gift or sample: date, recipient, item, cost, whether the recipient is an employee.
Sort employees from outsiders. Staff gifts go to the ₹50,000 test. Samples to outsiders do not.
Total per employee for the financial year. Add every gift of the year: festival hamper, birthday gift, voucher, milestone award.
Compare each total with ₹50,000. At or under: not a supply. Over: the gift is a supply between related persons. Value it under rule 28, CGST Rules 2017, and take your CA's view on how much is taxable.
Block the credit on goods given away. Under section 17(5)(h), CGST Act 2017, no credit on goods disposed of by way of gift or free samples. If credit was already taken, have your CA correct it.
Keep the paper. Purchase invoice, recipient list, approval note. If you are ever asked, you need to show who got what and why.

What not to do

Do not assume a gift under ₹50,000 also saves the credit. The ₹50,000 proviso decides whether the gift is a supply. It has no bearing on section 17(5)(h).
Do not split one large gift across family members or across months to stay under the limit. The proviso reads "to an employee" in "a financial year".
Do not book samples as ordinary stock and take the credit "because it is for business". Section 17(5)(h) names free samples.
Do not take credit on goods and then quietly gift them out. That is the exact pattern clause (h) catches.

What to do now

Next step: List every gift and sample in the current financial year and total each employee's gifts.
Deadline: The ₹50,000 test runs on the financial year (Schedule I, para 2, proviso, CGST Act 2017), so close your totals at the end of the financial year. For correcting credit and your return timing, check the current due date on the GST portal before you file.
Consequence: Gifts above ₹50,000 to one employee are treated as a supply (Schedule I, para 2, CGST Act 2017), so output tax arises. Credit on goods gifted or given as samples is not available (section 17(5)(h), CGST Act 2017). Credit taken on blocked items is credit you were not entitled to.

Have a CA review your facts before you act or file.

Frequently asked questions

Is a Diwali gift to staff under ₹50,000 subject to GST?
Not as a supply. Schedule I, para 2, CGST Act 2017 says gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee are not treated as supply. Credit on the goods is a separate question and is blocked under section 17(5)(h).

Does the ₹50,000 cover all employees together?
The words are "by an employer to an employee". Read it per employee, per financial year. Keep a separate running total for each person.

Can I take input tax credit on hampers I buy for employees?
Section 17(5)(h), CGST Act 2017 blocks credit on goods "disposed of by way of gift or free samples". So, no credit on the goods. A gift of a service is not named in clause (h). Ask your CA about it.

Do free samples to customers attract GST?
A plain free sample to an unrelated person is not a supply under section 7(1)(a) (no consideration) and falls outside Schedule I, para 2 (not related or distinct persons). The credit on the goods is still blocked under section 17(5)(h). If the sample comes bundled with a paid sale, take advice.

What if I gift more than ₹50,000 to one employee in a year?
Schedule I, para 2, CGST Act 2017 treats it as a supply between related persons (an employer and an employee are related under the Explanation to section 15). Value it under rule 28, CGST Rules 2017. The proviso does not say whether the whole gift or only the excess is taxed. Get your CA's view.

Is the salary I pay a supply?
No. Schedule III, para 1, CGST Act 2017 treats services by an employee to the employer in the course of or in relation to his employment as neither a supply of goods nor of services.

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