Free, but not really

Understanding the differences in taxation of free services and sale of goods between the pre-GST and GST regimes There may be free lunches, but it is quite clear that such lunches will not be free from tax. Recently, the tax department withdrew its demand notice to banks on free service. The Goods and Services Tax (GST) Council also issued an FAQ to clarify that certain free services provided by banks will not be subject to GST. But the free supply of goods and services is not altogether outside the purview of GST. An extra portion of garlic bread may not be liable to GST, but if you have the opportunity to hear a live performance, be prepared to pay GST. The pre-GST regime Taxation of free services and sale of goods were generally not an issue in the pre-GST regime. This was because the basis for levying a tax (taxable event) — sale of goods or provision of services — generally contemplated consideration for such goods or services. A more precise definition with respect to the nature of the taxable event also reduced ambiguity — ‘sale’ or ‘services provided’ as against ‘supply’ in GST law. Manufacture of goods made the goods liable to excise duty, and inter-State sale of goods was exclusively subject to Central Sales Tax (CST). Only the Central government could levy both. Under CST, sale contemplated consideration, as did many of the State Value Added Tax (VAT) laws. Service tax law contemplated ‘value of services’ to be the ‘gross amount charged’ or value as determined. Barring the demand on free services in banking transactions, there was far greater clarity and certainty under the service tax regime and there have been limited instances of the tax department valuing free services. In respect of excise duty, testing samples and free samples were not exempted from excise duty, unless exempted by a specific circular. To encourage exports or for other administrative reasons, transactions of such a class were exempted from tax.

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