ITC on Free Samples and Expired Goods: Section 17(5)(h)

Introduction

The GST Council, at its 57th meeting held in New Delhi on 8 October 2026, recommended that Section 17(5) of the CGST Act be amended to stop blocking input tax credit (ITC) on free samples and on goods destroyed or written off on expiry of shelf life.

For pharmaceutical, FMCG, cosmetics and food businesses, this is overdue. Physician samples and expired stock have generated reversals, audit objections and show cause notices since July 2017. The relief forms part of a wider package that also opens credit on outdoor catering, health and life insurance, telecom towers and pipelines.

A recommendation, however, is not law. Until Parliament amends Section 17(5) and the amendment is notified, the existing clause (h) and the CBIC circulars built around it continue to govern assessments. This note examines what the present law says, how the Department and the courts have applied it, and which questions the final drafting must answer.

The present law: one clause, many situations

Section 16(1) grants credit on inward supplies used in the course or furtherance of business. Section 17(5) then carves out exceptions, and it opens with a non-obstante clause that overrides both Section 16(1) and Section 18(1). Clause (h) denies credit on:

"goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples"

The clause bundles together events of very different character. Theft and accidental loss are involuntary. A gift is a deliberate act of generosity. A free sample is a marketing cost. Destruction of expired medicines is often a legal compulsion under drug and food-safety regulation. Yet all five attract the same consequence: the credit goes.

The policy justification usually offered is that credit follows taxable outward supply. Where goods never reach a taxable supply, the chain breaks and the credit should not survive. That logic sits uneasily with goods the business is legally obliged to destroy, or with samples whose cost is recovered through the price of goods later sold. It is this mismatch that the Council's recommendation seeks to correct.

Courts have read the clause with some care at its edges. In ARS Steels & Alloy International Pvt. Ltd. v. State Tax Officer (Madras HC, W.P. No. 2885 of 2020 & batch, decided 24 June 2021), the Court held that loss of inputs inherent in the manufacturing process is outside clause (h). The Court reasoned that the clause speaks of quantifiable losses caused by external factors or compulsions, not normal process loss. It relied on Rupa & Co. Ltd. v. CESTAT, Chennai, 2015 (324) ELT 295 (Mad.), decided under CENVAT.

Free samples: the Department's position and the case law

Under current law, credit attributable to free samples is blocked, and the Department and advance ruling authorities have applied the bar consistently. Samples are distributed across sectors to launch products, demonstrate features or let customers try before they buy: physician samples in pharma, sachets in cosmetics and food, demo units for durables and machinery. The cost is real and is ultimately priced into goods that are sold, but clause (h) disregards that.

CBIC's clarification. Circular No. 92/11/2019-GST dated 7 March 2019 on sales promotion schemes states two things. First, samples given free of cost are not a "supply" unless Schedule I applies. Second, credit on inputs, input services and capital goods used for free samples or gifts is not available, except where the distribution falls within Schedule I, in which case credit is allowed. The same circular treats "buy one, get one free" offers as a single supply of two goods for one price, so no reversal arises there.

Advance rulings. Authorities have followed the circular closely:

• PPD Pharmaceutical Development India Pvt. Ltd., In re [2025] 175 taxmann.com 711 (AAR-Maharashtra): drugs imported for clinical trials and supplied free to hospitals were held to be free samples. Credit was denied on the import IGST and on the customs broker and logistics services used to clear them.
• Sanofi India Ltd., In re, 2019 (10) TMI 1388 (AAAR-Maharashtra): credit on loyalty-programme rewards and branded "brand reminder" items (pens, notepads, key chains) given to distributors and doctors was in issue. The AAR had held these items to be gifts. The two AAAR members differed, so under Section 101(3) it is deemed that no advance ruling can be issued on those questions.

High Court. In a later round of the ARS Steels & Alloy International litigation, the Madras High Court upheld denial of credit on gold coins and T-shirts distributed for sales promotion. It held that clause (h) expressly covers gifts, and that VAT and Central Excise precedents allowing such credit cannot override the GST text.

Sample versus gift. The Council's recommendation, as reported, opens credit on free samples but not on gifts. That makes the line between the two decisive. A sample introduces the product itself to a prospective buyer; a gift is a free transfer made without that commercial purpose. Sanofi shows how readily branded promotional items are classed as gifts.

Promotional schemes and POSM. Two grey areas remain. Target-linked rewards given by brand owners to dealers and retailers are still exposed to the gift characterisation. Point-of-sale material (posters, danglers, standees) has also drawn objections. Circular No. 251/08/2025-GST dated 12 September 2025 helps on adjacent issues: post-sale discounts by commercial credit note need no reversal by the dealer, and dealer promotion is a separate taxable service only under a specific agreement with defined consideration. It does not address goods given free.

Output tax is a separate question. Restoring credit does not make free distribution tax-free. Where a distribution is itself a supply, for instance to a related or distinct person under Schedule I, output tax remains payable.

Expired goods: where the goods expire decides the answer

The relief for expired goods matters to any business whose products carry a shelf life: medicines, food, cosmetics, chemicals, agro-inputs. Regulation often requires such goods to be withdrawn and destroyed through a prescribed process. Under the present clause (h), that compulsion makes no difference; destruction or write-off still blocks the credit.

Expiry at the manufacturer's premises. If stock expires before it leaves the factory or depot and is then destroyed or written off, clause (h) applies directly and the attributable credit must be reversed. Advance rulings apply the bar strictly:

• Kanayalal Pahilajrai Balwani (Sidharth Foods), In re, GUJ/GAAR/R/16/2021 dated 30 June 2021: credit on inputs used in cakes and pastries that expired on display and were thrown away had to be reversed. The authority treated discarding expired food as destruction and relied on Circular 72/46/2018-GST.
• Geekay Wires Ltd., In re, Order-in-Appeal No. AAAR/05 of 2025 dated 20 February 2025, [2025] 173 taxmann.com 958 (AAAR-Telangana): credit on inputs consumed in finished goods later destroyed by fire was reversible, even though the destroyed goods were sold as scrap on payment of tax. The AAAR rejected the argument that clause (h) reaches only inputs that are themselves destroyed.

These rulings bind only the applicants, but they show how the Department reads the clause: once finished goods are destroyed, credit on the inputs embedded in them goes too.

Expiry after the goods have been sold. The harder case is stock that expires at the stockist or retailer after the manufacturer has sold it and paid output tax. Tax has already moved down the chain with each sale. Asking the manufacturer to reverse input credit on goods it has already supplied on payment of tax looks unfair.

Circular No. 72/46/2018-GST dated 26 October 2018 governs returns of time-expired drugs and medicines. It offers two routes:

1. Return as a fresh supply. The wholesaler or retailer raises a tax invoice on the return, and the manufacturer takes credit of that tax. If the manufacturer then destroys the goods, it reverses the credit taken on the return supply, not the credit attributable to original manufacture.
2. Return against a credit note. The goods move under a delivery challan and the supplier issues a credit note. Within the Section 34(2) time limit, the supplier may reduce output tax, provided the recipient has not taken, or has reversed, the credit. After that limit, a credit note may still be issued but tax cannot be adjusted and the note need not be uploaded. On destruction, the manufacturer reverses the credit attributable to manufacture of those goods.

It is the second route, especially after the Section 34 deadline, that has generated disputes. The manufacturer cannot reduce its output tax, yet is asked to reverse input credit as well, so tax is borne twice.

How courts read blocked credits

The lesson of the case law is that blocked credits are upheld as valid, read on their plain words, and narrowed only where the words themselves allow it. Relief for expired goods and samples therefore has to come from Parliament, not from interpretation.

• Validity. In Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., 2024 INSC 756 (decided 3 October 2024), the Supreme Court rejected the constitutional challenge to Section 17(5)(c) and (d). It held that the legislature may restrict credit, while applying a functionality test to the words "plant or machinery" in clause (d). Parliament then amended clause (d) through the Finance Act, 2025 with retrospective effect, displacing that reading. The episode shows that relief under Section 17(5) is legislative, and can be taken away the same way.
• Plain words. The Telangana AAAR in Geekay Wires refused to read "in respect of" in clause (h) as confined to inputs, calling the clause simple and unambiguous.
• Edges. The Madras High Court in ARS Steels (2021) kept normal process loss outside clause (h), because it is not loss by an external event. The same Court later held that promotional gifts fall squarely within the clause.

For expired stock, this means a manufacturer litigating under the present clause has limited room. The stronger arguments are the post-sale cases (tax already paid on supply), the Section 34 trap, and the challenge to Circular 72/46/2018-GST now before the Gujarat High Court.

What the amendment must settle

The value of the reform will turn on drafting. Six points need express answers:

1. "As required by law." Does this mean only destruction mandated by a statute, or also disposal under rules, regulatory directions, licence conditions or guidelines such as those of CDSCO or FSSAI? A narrow reading would exclude much of what industry actually does.
2. Write-off versus destruction. A write-off is an accounting entry; destruction is a physical act. Expired stock is often written off first and destroyed later through an authorised agency. The provision should say whether a write-off linked to legally required disposal qualifies on its own, and what happens in the gap before physical destruction.
3. Destruction before expiry. Recalls for quality failure, contamination, transit damage, cold-chain breaks or regulatory orders also force disposal, but none involves expiry of shelf life. Unless the text covers them, they stay blocked.
4. Commercial write-offs. Obsolete, slow-moving or commercially damaged stock is unlikely to be covered and should be presumed blocked.
5. Gifts and promotional goods. If free samples are freed but gifts are not, a statutory or circular-level test for the difference is needed to prevent a fresh wave of disputes. Treatment of dealer incentives and POSM should be stated, not left to inference.
6. Commencement and past periods. The Council's recommendation fixes no date and grants no retrospective relief by itself. If prospective, pending show cause notices and appeals on earlier reversals continue under the old clause. If retrospective, the transitional provision must say whether reversed credit can be re-availed or refunded, and how pending demands are dealt with. Circular 72/46/2018-GST and the free-samples part of Circular 92/11/2019-GST will also need to be revised or withdrawn.

What businesses should do now, and conclusion

Until the amendment is enacted and notified, keep reversing credit under the present clause (h) and build the record that the new law is likely to demand.

• Continue reversals on free samples, gifts and destroyed or written-off stock under the existing law; do not anticipate the amendment in returns.
• Record for each disposal: product, batch, expiry date, quantity, reason, regulatory basis, and the destruction certificate or agency record.
• Separate expiry-driven write-offs in the books and inventory system from damage, breakage, recall and obsolescence.
• Classify promotional outflows as samples, gifts, dealer incentives or POSM, with the commercial purpose documented.
• For returned expired goods, record which route under Circular 72/46/2018-GST was used and whether the Section 34(2) time limit was met.

The recommendation is a sound correction. Credit should not be lost merely because the law compels a business to destroy goods, or because the business samples its own product to build sales. How much relief it delivers will depend on precise wording, workable proof requirements and a clear rule for past periods.