Schedule I Entry 2: Stock Transfers in the FMCG Supply Chain

Schedule I Entry 2 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.

An FMCG company with four State registrations is, for GST purposes, four separate taxable persons. Every carton that moves between them is a supply — invoiced, valued, taxed and e-way-billed — even though not a rupee changes hands and the goods never leave the company's ownership.

Section 7(1)(c) treats the activities in Schedule I as supply even without consideration. Entry 2 of that Schedule 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." Section 25(4) provides that separate registrations under the same PAN are distinct persons, and section 25(5) extends this to establishments in India and outside India. So transfers between factory and depot, depot and warehouse, warehouse and branch office, and one State registration and another are all taxable supplies.

The four entries of Schedule I, in FMCG terms

Entry 1 — permanent transfer or disposal of business assets where ITC has been availed. This catches an FMCG company permanently disposing of "refrigeration units, display freezers, vending machines, manufacturing equipment, or promotional assets on which ITC was earlier availed."

And note the credit consequence the ICAI Guide draws out. "Since the transaction itself is treated as a taxable supply under Section 7(1)(c) read with Schedule I, the asset continues to be used for making a taxable outward supply. Therefore, Section 17(5)(h) has no application in such cases, and there is no requirement to reverse the ITC originally availed on the asset." GST is instead paid on the value under section 15 read with rules 27 to 31.

That is the dividing line with section 17(5)(h). Where the transaction "is ordinarily not regarded as a taxable supply, as there is no consideration and the transaction is generally not covered by Schedule I", credit is denied instead. A deemed supply keeps the credit and pays output tax; a gift or free sample loses the credit and pays nothing. Free samples and section 17(5)(h) →

Entry 2 — distinct and related persons. The one that governs the FMCG supply chain.

Entry 3 — principal and agent. Significant because "the FMCG sector extensively operates through Carrying and Forwarding (C&F) agents, consignment agents, redistribution stockists and commission agents." Where goods are supplied by a principal to an agent for onward supply, or by an agent to a principal, the movement may be a deemed supply even with no consideration.

What "distinct person" actually reaches

Section 25(4): a person who has obtained or is required to obtain more than one registration, "whether in one State or Union Territory or more than one State or Union Territory", is treated as distinct persons in respect of each.

Note the words "or in one State". Two registrations for different business verticals within a single State are also distinct persons — the concept is not confined to inter-State structures.

Section 25(5) extends it further: "establishments of the same person located in India and outside India shall also be treated as distinct persons."

The Guide's illustration takes a manufacturer with a factory in Himachal Pradesh, a depot in Delhi, a warehouse in Maharashtra and a redistribution centre in Karnataka: "Each GST registration is treated as a separate taxable person. Therefore, movement of goods between these registrations constitutes a supply under Schedule I even if no consideration is charged."

And the tax follows the place of supply. "stock transfers between distinct persons located in different States are also treated as inter-State supplies under the IGST Act" — so IGST, and a registration in each State from which taxable supplies are made.

The documentation this forces

A tax invoice, not a delivery challan. The Guide is explicit: "For inter-State stock transfers between distinct persons, however, a tax invoice is required because such transfers constitute supply under Schedule I of the CGST Act."

A delivery challan under rule 55 covers only non-supply movement — "job work, promotional stock movement, exhibition stock, goods sent on approval basis or temporary stock transfers".

An e-way bill under rule 138 wherever consignment value exceeds ₹50,000, "irrespective of whether the movement is pursuant to a tax invoice, delivery challan or bill of supply" — and failure risks detention under section 129.

Valuation under rule 28, with the 90% rule and the full-ITC proviso doing most of the work in practice. Rule 28 valuation →

The ₹50,000 employee gift proviso

The Proviso to Entry 2 provides that "gifts by an employer to an employee not exceeding ₹50,000 in a financial year shall not be treated as supply." The Guide notes this "assumes relevance where FMCG companies distribute festival hampers, product gift boxes, or promotional gifts to employees."

But the proviso does only one thing, and the Guide is careful about it:

"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). Conversely, where the value of gifts exceeds ₹50,000 and GST is payable under Schedule I, an arguable view exists that ITC should be admissible since tax has been discharged on the outward supply."

So the proviso produces a mildly perverse outcome. A ₹40,000 hamper: no output tax, no credit. A ₹60,000 hamper: output tax, and arguably credit. The threshold is per employee per financial year, and is cumulative across the year, not per occasion.

Cooperatives, and section 7(1)(aa)

Section 7(1)(aa), inserted by the Finance Act, 2021 with retrospective effect from 1 July 2017, includes "the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration", with an Explanation deeming the person and its members to be two separate persons "notwithstanding anything contained in any other law… or any judgment, decree or order of any Court".

The target is the mutuality doctrine. As the Guide puts it: "Dairy cooperatives, agricultural marketing federations and similar organisations… can no longer contend that transactions between the organisation and its members are outside GST merely because of the principle of mutuality."

So supplies by a cooperative to its member societies, distributors or constituent units are taxable supplies — a significant point for the dairy and edible-oil segments where the cooperative structure dominates.

What Schedule III takes back out

Section 7(2) opens "Notwithstanding anything contained in sub-section (1)", and puts Schedule III activities outside supply altogether.

For FMCG the important exclusions are:

• services by an employee to employer in the course of employment — so "salaries, wages, bonuses and employment benefits… remain outside the scope of GST";
• sale of land and completed buildings — relevant when an FMCG company disposes of "factory land, warehouse land, or completed immovable property";
• transactions in securities, shares, debentures and certain actionable claims;
• for multinationals, offshore supplies "where goods move directly from one non-taxable territory to another without entering India" — the merchant trade case.

But note the sting in the exclusions. Sale of land and building, and transactions in securities, are expressly counted as exempt supplies under section 17(3) for rule 42 reversal purposes, even though they are not supplies at all. Blocked and apportioned credit in FMCG →

Key takeaways

• Section 7(1)(c) and Schedule I make certain transactions supplies without any consideration.
• Section 25(4) makes every registration under the same PAN a distinct person — within a State as well as across States.
• Movements between factory, depot, warehouse and branch are therefore taxable supplies, requiring a tax invoice and an e-way bill, not a delivery challan.
• Entry 1 deemed supplies keep the ITC and pay output tax; goods under section 17(5)(h) lose the ITC and pay nothing.
• Entry 3 brings C&F agents, consignment agents and redistribution stockists into scope.
• Gifts to an employee up to ₹50,000 a year are not a supply — but the 17(5)(h) block still applies.
• Section 7(1)(aa), retrospective to 01.07.2017, ends the mutuality argument for cooperatives and federations.
• Schedule III excludes employment services, sale of land and completed buildings, and securities — but several of these still count as exempt supply under section 17(3).

Read next

• Rule 28 Valuation: The 90% Rule and the "Any Value" Proviso
• Free Samples and Gifts: Section 17(5)(h) Against Schedule I Entry 1
• ISD Mandatory From 1 April 2025, Against Cross Charge

Disclaimer: Positions stated as on 5 September 2026, based on sections 7, 15, 17(3), 17(5)(h) and 25 of the CGST Act, 2017, Schedules I and III thereto, and rules 27 to 31, 55 and 138 of the CGST Rules, 2017, as reproduced in the ICAI GST Sectoral Guide on Fast-Moving Consumer Goods (July 2026, updated with Finance Act, 2026 amendments).