Businesses give gifts to employees, customers, dealers and vendors. The GST consequence depends on who receives them, how they are given, and whether the company is trying to recover the tax on what it bought.
Step 1: Is it a supply at all?
GST applies to supplies, which normally need consideration. A genuine free gift to an unrelated person is generally not a supply. Schedule I creates exceptions for certain supplies without consideration between related persons, and it specifically covers employer-to-employee gifts.
Step 2: Who is the recipient?
| Recipient | Output GST | ITC on the purchase |
|---|---|---|
| Employee, gifts up to ₹50,000 a year | Not a supply | Blocked under section 17(5)(h) |
| Employee, gifts above ₹50,000 a year | Deemed supply, GST payable | Commentary views it as available where GST is paid on the deemed supply (confirm) |
| Customer, dealer, vendor (unrelated) | Generally no GST on a pure gift | Blocked under section 17(5)(h) |
| Free samples | Generally not a supply | Blocked (see below on the 57th Council) |
Section 17(5)(h) blocks credit on goods disposed of by way of gift or free samples. Practically, this means the GST paid on hampers and gifts becomes a cost.
Freebies tied to a sale
A "free" item that is part of a promotional scheme linked to a purchase, such as buy one get one free, is normally treated as part of the main supply and taxed with it. The price charged for the main supply carries the tax. Here the item is not a pure gift, so the block on gifts is less likely to apply, but document the scheme terms.
Gift vouchers
Gift vouchers are taxed when the underlying supply is identified or the voucher is redeemed. They still count towards the income-tax gift limit for employees and the withholding limit for business associates.
Reverse the credit if you took it
If ITC was claimed at purchase and the goods were then gifted, reverse it. Commentary places the reversal in Table 4(B) of GSTR-3B. Delays can attract interest under section 50.
The 57th GST Council
On 8 October 2026, the Council recommended unblocking ITC on, among other items, free samples. That is a recommendation. Until the CGST Act is amended, the section 17(5)(h) block applies, and the recommendation as reported concerns samples rather than festive gifts.
Income tax for gifts to business associates
Gifts and benefits to dealers, distributors and customers can attract TDS at 10% where the aggregate benefit to a resident in the year exceeds ₹20,000. This was section 194R and now sits under section 393 of the 2025 Act, per commentary. If the benefit is wholly in kind, ensure the tax is paid before releasing it. Ordinary trade discounts are not benefits for this purpose.
Checklist
- Separate employee gifts from customer and dealer gifts in your records.
- Track employee gifts against both ₹15,000 (income tax) and ₹50,000 (GST).
- Decide early whether a high-value gift should be deliberately taxed as a supply.
- Reverse any ITC taken on gifts.
- Run the section 393 withholding check for dealer and customer gifts.
- Document promotional schemes so that a freebie is clearly part of the sale.
Bottom Line
The Diwali gift costs more than its price tag. GST is generally unrecoverable on pure gifts, and the income-tax and TDS rules sit on top.
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