Pharma companies have approached the Bombay High Court for clarity on free samples and gifts to be considered as genuine expenses under GST, people in the know of the matter told CNBC-TV18.

The drugmakers feel free samples and gifts are costs for the business, business promotion and marketing, and wrong treatment under GST is leading to blockage of input tax credit under section 17(50(h), the sources added.

Meanwhile, sources at the Central Board of Indirect Taxes & Customs (CBIC) believe that free samples and gifts are also sales and are not entitled to input costs.

The Bombay High Court has issued notices to the Union of India, the Central Board of Indirect Taxes and Customs (CBIC) and Goods and Services Tax Council to defend the case, the sources said.

Experts said that a 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, partner at PwC India, said that 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.

New TDS guidelines and how they will affect doctors

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.