Reversal of ITC on free samples exported

[Hariharan Sundaram]

Dear experts,

Whether ITC has to be reversed on export of free sample if required how to quantify it ?

[YAGAY andSUN]

Please check the Section 17(5) (h) of the CGST Act in this connection. Further EDF/GR Wavier needs to be applied by you from your A.D./Banker.

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;

Quantification of Reversal of ITC - On actual and proportionately basis

[YAGAY andSUN]

Also refer following para of RBI Master Direction in connection with EDF.

C.1 Grant of EDF waiver 14AD Category – I banks may consider requests for grant of EDF waiver from exporters as under: Status holders shall be entitled to export freely exportable items (excluding Gems and Jewellery, Articles of Gold and precious metals) on free of cost basis for export promotion subject to an annual limit as below:

a) Annual limit of 2% of average annual export realization during preceding three licensing years for all exporters (excluding the exporters of following sectors-(1) Gems and Jewellery Sector, (2) Articles of Gold and precious metals sector).

b) Annual limit of Rupees One Crore or 2% of average annual export realization during preceding three licensing years, whichever is lower. (for exporters of the following sectors- (1) Gems and Jewellery Sector, (2) Articles of Gold and precious metals sector).

c) In case of supplies of pharmaceutical products, vaccines and lifesaving drugs to health programmes of international agencies such as UN, WHO-PAHO and Government health programmes, the annual limit shall be upto 8% of the average annual export realization during preceding three licensing years. Such free of cost supplies shall not be entitled to Duty Drawback or any other export incentive under any export promotion scheme. Exports of goods not involving any foreign exchange transaction directly or indirectly requires the waiver of EDF procedure from the Reserve Bank

[KASTURI SETHI]

I strongly support the views of M/s.Yagay and Sun, Sir. W.e.f. 23.3.20, realisation of foreign exchange is required in case of export of goods.

[Hariharan Sundaram]

Thank you very much for both the experts

[Shilpi Jain]

What is the purpose of the sample? Is it for testing or a pre-requisite for fulfilling a customer order or any other reason. Based on the purpose the requirement for reversal can be decided.

In case of testing it would be eligible and so would be a case of fulfilling a contract term. Pls provide additional facts.

[Hariharan Sundaram]

Thank you Madam , the sample is exported to the overseas buyer as "Trade sample" in order to get future export orders and the same is exported free of cost , no foreign exchange received and exported as per the norms of DGFT.

[ABHISHEK TRIPATHI]

Dear Hariharan Ji,

According to Circular No. 92/11/2019-GST, supply of goods as free samples (without any consideration) will not qualify as supply and ITC should be reversed under section 17 (5) (h) of the CGST Act. The same hold good for export of goods. On exception they have carved out is with respect to Schedule I and querist case doesn’t fall under such situation.

[Sandeep Garg]

In my opinion, samples given for trade purposes is for business promotion. There can not be sale unless I show sample to my buyer. In my opinion, it is a sales promotion expenses and ITC is allowed.

When you go to sweet shop, you taste the sweet and then buy. It means to the extend sweet is tasted, I need to reverse ITC. It looks ridiculous proposition, if it is so.

[ABHISHEK TRIPATHI]

Cant agree more with the sweet shop example. To that extent ITC should be allowed. Misuses are inevitable, like employees of sweet shop taking sweet as free sample (avoiding GST) for those situation Government may regulate.

[KASTURI SETHI]

Yes, Sir. With due regards to experts, I opine that there is a gulf between two situations. The example of sweet shop is not relevant here.

[SAKTHIVEL K]

In my view, ITC reversal is not required on FOC with respect to exports so long as goods are exported out of India. But FOC export will not qualify for export incentive since no BRC exist here.

[Shilpi Jain]

Also the goods which are sent as a sample cannot be treated as gifts. There is a business reason for this and not a merely disposal by way of gift. This would be the reason why reversal u/s 17(5) would not be attracted. There are several other grounds on which the credit reversal if demanded can be challenged

[KASTURI SETHI]

It is correct that sample cannot be treated as gift. Here sample is free and free sample is hit by Section 17(5) (h). No foreign exchange earned.

[KASTURI SETHI]

Supply of sample (free) for export without earning foreign exchange tantamounts to supply for home consumption without payment of duty/tax. Hence reversal required.

[Shilpi Jain]

Right.. I missed the free sample part of it. However, one more argument which can be taken is that the goods (i.e. inputs, raw material) in respect of which credit is taken and the goods which are exported are different.

Hence reversal may not be required. This is for the reason that 'in respect of', based on the context of its usage, in this case has to be considered to mean 'on'. So ITC is restricted only if traded goods are given as a free sample.

This view is not free from deaprtment dispute. So you could consider to be reverse credit in case a dipute free approach is desired.

[Shilpi Jain]

However, there is no mechanism prescribed in the law to determine the amount of reversal. So a reasonable means can be adopted. i.e. take the costing data to estimate the amount of ITC involved in it per unit and reverse.

You could also consider making an intimation to the department in this regard .

AI Summary

Reversal of Input Tax Credit on free export samples may be required where no foreign exchange is realised, affecting compliance and quantification. Whether Input Tax Credit must be reversed on export of free trade samples where no foreign exchange is realised: free samples are commonly treated as disposals attracting ITC reversal, while counter arguments stress business purpose and distinguish samples from gifts. Practically, exporters should consider an EDF waiver when no foreign exchange is earned and recognise that export incentives may be affected. There is no statutory formula for reversal; practitioners typically reverse on an actual or proportionate basis using costing data, and may challenge reversal where credited inputs are not the goods exported as samples.