Free Samples and Gifts: Section 17(5)(h) Against Schedule I Entry 1

Free Samples and Gifts explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

There is a neat circularity here that the ICAI Guide unpicks carefully. Entry 1 of Schedule I taxes the disposal of a business asset only where input tax credit "has been availed" on it. On a free sample, section 17(5)(h) blocks the credit. So the credit is never availed, and Entry 1 can never engage.

Free samples distributed without consideration are not a supply under section 7(1)(a), and generally fall outside Schedule I, so no GST is payable on the distribution. But section 17(5)(h) blocks ITC on "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples" — so the credit attributable to those goods must be reversed. Circular No. 92/11/2019-GST dated 07.03.2019 confirms both limbs: free samples are not a supply "except where covered by Entry 2 of Schedule I", and ITC on them is blocked.

Why Entry 1 does not reach a free sample

Entry 1 treats as supply the "permanent transfer or disposal of business assets where input tax credit has been availed on such assets."

The Guide poses the question directly — whether free samples, being goods and therefore business assets in a general sense, could be caught by Entry 1 even without consideration — and then answers it:

"Entry 1 requires that ITC has actually been availed on the asset being disposed of. Section 17(5)(h)… provides that input tax credit shall not be available in respect of goods… disposed of by way of gift or free samples. Where credit has been taken on inputs used in manufacturing such samples, it must be reversed; where it has not been taken, it stands blocked from the outset. In either case, at the point of disposal there is no ITC standing availed against the samples, and the precondition to Entry 1 is not satisfied."

And the Guide reinforces the reading from the structure of the circular itself:

"Had Entry 1 been intended to apply, there would have been no need to block ITC separately, since a deemed taxable supply under Schedule I would itself entitle the supplier to credit under Section 16(1). The Circular's approach of denying credit rather than taxing the disposal confirms that Entry 1 is not the operative provision for free samples given to unrelated customers."

That is the cleanest way to hold the two provisions apart. Entry 1 is the credit-preserving route: pay output tax, keep the credit. Section 17(5)(h) is the credit-denying route: pay nothing, lose the credit. The law picks one or the other, never both.

The exception the circular preserves

Circular No. 92/11/2019-GST clarifies that free samples do not qualify as supply "except where covered by Entry 2 of Schedule I (transactions between related or distinct persons)".

So the analysis flips where the recipient is a branch or a group company. Samples sent from a Maharashtra factory to a Karnataka depot are a supply under Entry 2, valued under rule 28 — irrespective of the absence of consideration. It is only samples to unrelated customers that escape.

This matters more than it first appears in FMCG, where trial stock is routinely centrally manufactured and pushed to State depots before onward distribution. The internal leg is taxable; the external leg is not, and the credit position differs on each.

The illustrations, and where the credit falls

Consumer trial packs. "An FMCG company launches a new shampoo. It manufactures 5 lakh sachets of 5 ml trial packs and distributes them door-to-door without any consideration. ITC on all inputs, packing materials and other costs attributable to the 5 lakh trial packs is blocked under Section 17(5)(h)."

Note what the block reaches — not merely the finished sachet, but the inputs, packing materials and other attributable costs. A proportionate reversal, batch-costed.

Festival gifting to trade. "An FMCG company distributes Diwali hampers (containing company's own products) to key distributors / dealers, business associates, employee etc. Such gifting constitutes 'disposal by way of gift' under Section 17(5)(h). ITC on the products included in Diwali hampers is blocked."

The employee limb has its own wrinkle. Under the Proviso to Entry 2 of Schedule I, gifts by an employer to an employee up to ₹50,000 in a financial year are not a supply — "However, this Proviso governs only the taxability of the outward supply and does not, by itself, remove the ITC restriction contained in Section 17(5)(h)." And where the gift exceeds ₹50,000 and GST is paid under Schedule I, "an arguable view exists that ITC should be admissible since tax has been discharged on the outward supply." Schedule I and the ₹50,000 proviso →

Promotional merchandise. T-shirts and caps given to the trade are "Outright gift, no consideration, no Schedule I coverage" — ITC blocked under section 17(5)(h).

Section 17(5)(g): the parallel block

Section 17(5)(g) blocks ITC on "goods or services or both used for personal consumption", and the Guide describes it as "a standalone, catch-all blocking provision that operates independently of the other clauses" — one that "focuses not on the nature of the goods or services procured but on their end use."

Read with section 17(1):

• exclusively personal — ITC fully blocked under 17(5)(g);
• partly business, partly personal — ITC available only to the extent of business use, apportioned under section 17(1).

The Guide's illustrations run from the obvious to the fine. A promoter's household groceries bought through the company system: blocked. A company flat furnished for a director's personal residence: blocked, and "to be distinguished from a guest house maintained for business visitors, where apportionment under Section 17(1) may be applicable."

And the company's own products given to employees need a three-way analysis: mandatory under labour law — the statutory obligation exception may apply; provided as a taxable perquisite — the personal consumption angle is present; gifted — section 17(5)(h) applies.

CSR: settled, prospectively

Section 17(5)(fa), inserted by the Finance Act, 2023 with effect from 01.10.2023, blocks ITC on goods or services "used or intended to be used for activities relating to obligations under Corporate Social Responsibility referred to in section 135 of the Companies Act, 2013."

"Prior to the insertion… the availability of ITC on CSR expenditure was a hotly debated issue. The insertion… conclusively settles the controversy by expressly blocking ITC prospectively from 01.10.2023."

One open question the Guide flags. Whether the block reaches only the mandatory 2% or extends to voluntary CSR beyond the mandate: "A strict reading of Section 17(5)(fa) suggests that it applies to 'obligations under corporate social responsibility referred to in Section 135'. Accordingly, purely voluntary social expenditure beyond the statutory mandate may not be caught… though such expenditure still requires evaluation under Section 16(1) for business nexus."

The FMCG illustration is direct: a food company distributing its own food packets under a mid-day meal programme as a CSR obligation has its ITC on those goods blocked from 01.10.2023.

Key takeaways

• Free samples to unrelated customers are not a supply — no output GST.
• Entry 1 of Schedule I cannot apply, because its precondition — ITC availed — is never satisfied where section 17(5)(h) blocks the credit.
• Circular No. 92/11/2019-GST confirms both limbs, with an exception for Entry 2 (related and distinct persons).
• Samples moved between branches are taxable supplies under Entry 2, valued under rule 28.
• The block reaches inputs, packing materials and other attributable costs, not just the finished sample.
• Diwali hampers and promotional merchandise given to trade are gifts — ITC blocked.
• The ₹50,000 employee gift proviso removes the output tax, not the ITC block.
• Section 17(5)(g) independently blocks credit on personal consumption; section 17(1) apportions mixed use.
• Section 17(5)(fa) blocks CSR credit from 01.10.2023; voluntary spend beyond section 135 may fall outside it.

Read next

• BOGO: Buy One Get One Free Schemes Under GST
• Blocked Credit in FMCG: Expired Stock, Recalls and Transit Losses
• POS Materials, Visi Coolers and Branded Refrigerators Under GST

Disclaimer: Positions stated as on 5 September 2026, based on sections 7, 16(1), 17(1) and 17(5)(fa), (g) and (h) of the CGST Act, 2017, Schedule I thereto, and Circular No. 92/11/2019-GST dated 7 March 2019, as reproduced in the ICAI GST Sectoral Guide on Fast-Moving Consumer Goods (July 2026, updated with Finance Act, 2026 amendments).