Pharma firms seek clarity from Bombay HC on free samples to be considered as genuine expense under GST: Sources

At a time when marketing practices of pharma companies are already under question and government scanner, pharma majors have raised yet another concern with the government. Drugmakers have approached Bombay High Court seeking legal clarity as to whether the free samples and gifts provided by pharma companies to doctors, chemists, etc are business expense or not.

According to sources, pharma companies feel that the free samples and gifts provided by them are to promote sales, part of marketing activities and thus are genuine business expense, for which they should be entitled for input tax credit refund when they file their GST returns.

On the contrary, sources at the Central Board of Indirect Taxes and Customs (CBIC) said the government’s view is very clear — “free samples and gifts are no business expense, they are also part of sales and thus should be considered as sales getting revenue, which is not entitled to any ITC credit.”

The tussle being such that the GST authorities have blocked handsome ITC amount of pharma majors, which they have claimed in their returns.

The matter is now in front of Bombay High Court to assess and come up with the legal solution.

“Notices have been issued to Union of India, Finance Ministry, CBIC and GST authorities to defend their stand,” sources added.

Experts said clarity on this is an urgency as the industry has a good quantum of ITC which is stuck, without sharing the figure.

“The provisions of section 17(5)(h) result in blocking the credits and hence are against the objectives of GST,” said Abhishek A Rastogi, founder of Rastogi Chambers, who is arguing against such blocking of credits. Free samples and gifts are genuine business expenses and form the core of promotional activities; hence any denial of credits are subject to judicial review of even the policy decision, he added.

Similarly Pratik Jain, a partner at PwC India, said, generally any input used for business should be eligible for credit. "Cost of free samples or gifts is included in the product pricing and therefore there is no reason to deny the credit. Irrespective of the outcome here, the GST Council should try to simply the input credit provisions which is leading to avoidable disputes,” he added.

The discussion attains importance in the backdrop of the fact that in February last year, the Supreme Court held that granting freebies to doctors by pharma companies for boosting sales of medicines is prohibited by law, as it dismissed a plea of a firm seeking deduction under the Income Tax Act on account of giving incentives to medical practitioners.

Also, according to the new TDS guidelines issued by the CBIC, 'gifts' received by doctors and social media influencers have been under the tax gambit from July 1 last year.

The provision introduced in the Finance Act 2022 as section 194R mandates a 10 percent tax deducted at source (TDS), exclusive of surcharge and cess, on freebies exceeding Rs 20,000 in a year that influencers and doctors receive and retain from sales promotions.

The guidelines provide examples of freebies where tax will be deducted under section 194R. These include medicine samples given for free to doctors as well as incentives in the form of cash, TV, car, computers (or any other gadgets), outfits, cosmetics, gold coins, jewellery, sponsored trips, and free tickets to events are given to social media influencers.

For doctors, the Central Board of Direct Taxes (CBDT) clarified that section 194R would apply to the distribution of free samples to a hospital when doctors receive free samples while employed there. Such samples can be considered taxable perquisites for employees by the hospital, and thus tax can be deducted under Section 192. In such a case, the threshold of Rs 20,000 must be viewed in relation to the hospital, as per the norms.