Review a free-of-charge transaction in two stages: determine whether it is a supply under GST, then determine valuation and documentation if it is. Section 7 and Schedule I mean that some transactions without consideration can still be supplies. Separately, gifts and free samples can affect input tax credit. A zero-price invoice line or marketing label does not answer those questions for every case.
Identify what “free” means in the arrangement
Ask whether the recipient gives money, goods, services, publicity or another contractual benefit in return. A non-cash exchange is different from a gift with no consideration. A customer receiving two items for one combined price is also different from an independent free sample.
Keep the offer, recipient list and purpose. A sales executive may call an item free because it has no separate line price, even though the customer must purchase another product to receive it. Read the entire offer before classifying the movement. The business needs a factual description, not a conclusion copied from promotional artwork.
Check Schedule I before concluding there is no supply
Schedule I includes specified transactions without consideration, such as covered supplies between related or distinct persons in the course or furtherance of business. It also addresses other categories, including specified business-asset disposals and principal-agent situations. Examine the actual category and its conditions rather than assuming that every internal or free movement is outside GST.
A transfer of stock from one GST registration to another registration of the same business may therefore require a supply and valuation review despite no external cash payment. Conversely, a genuine sample to an unrelated prospective buyer needs a different analysis. Record recipient identity and relationship before selecting the transaction type.
Distinguish samples from purchase-linked offers
CBIC Circular 92/11/2019 explains that free samples without consideration generally do not qualify as supplies except where Schedule I applies. The circular separately considers buy-one-get-one offers as supplies made for a combined price, with composite-or-mixed-supply analysis relevant to taxability.
Do not issue every promotional dispatch under the same zero-value code. Create separate records for independent samples, purchase-linked packages, replacements, warranty obligations and branch transfers. Each should have a reason and an approved treatment. A replacement under an existing contract is not automatically the same legal situation as a gift to a new customer.
Illustrative sample and package comparison
Suppose a trader distributes fifty genuinely free samples costing ₹200 each to unrelated prospects, with no consideration and no Schedule I application. The commercial stock cost is ₹10,000. If the relevant purchase tax was ₹1,800 at an assumed 18% rate, review the blocked-credit consequences for gifts or free samples under section 17(5)(h), with the actual attribution and circular guidance.
Now consider fifty packages sold for ₹600 each containing two items under one promotional price. Total consideration is ₹30,000, not zero for every second item merely because the advertisement says “free.” Review whether the arrangement is composite, mixed or otherwise independently supplied, then calculate tax using the approved treatment.
Determine value where a no-consideration supply exists
If the transaction is a taxable supply without consideration, a zero amount cannot substitute for the prescribed valuation review. Identify the relevant rule, such as Rule 28 for covered related or distinct-person supplies, and retain its evidence and proviso analysis. Do not adopt cost as a universal default without checking the sequence and conditions.
For example, a covered branch transfer with an approved taxable value of ₹40,000 at an assumed confirmed 18% rate would produce ₹7,200 tax even if no cash is collected between branches. Keep the valuation record and receiving branch entry linked to the document. Consolidated accounts do not remove the separate GST record.
Preserve stock and movement evidence
Record item, quantity, unit, recipient, date, purpose, authorisation and the document used for movement. Where movement is for a reason other than supply, examine the delivery-challan requirements and applicable e-way bill rules. A non-sale movement still needs accurate operational records.
Reconcile the promotional register to inventory issues. If one hundred samples are approved but one hundred and twenty leave the warehouse, investigate the difference. Otherwise an accounts team may review tax on one quantity while stock records show another. Keep returned or unused samples separately identified rather than reversing the entire approved issue automatically.
Set a promotion identifier in the stock issue and approval records. If the scheme changes midway, preserve the old and new terms rather than editing the original approval. This helps distinguish goods already issued as independent samples from later purchase-linked offers, even when the same SKU appears in both campaigns.
Keep ITC and output-tax conclusions separate
A conclusion that there is no output supply does not automatically mean all input credit is available. Equally, a transaction falling within Schedule I can have a different credit analysis from an ordinary gift. Record both conclusions and the relevant statutory conditions.
Avoid customer-facing promises that a zero-price item carries no GST consequences in every situation. The seller's valuation, the recipient's credit position and the physical movement can each need separate checks. A concise internal approval should state those outcomes rather than one broad “free goods exempt” label.
The right process starts by asking why the goods leave and what the recipient provides in return. Once consideration, relationship and the promotion structure are clear, the business can select the appropriate valuation, credit treatment and movement document. That keeps marketing language from replacing the GST analysis.