Free Goods and Scheme Goods: What They Really Cost You
Free goods do not cut the price — they cut the cost per unit. The arithmetic everyone gets wrong, and why most systems record scheme goods incorrectly.
In short
Free goods reduce your cost per unit by increasing the quantity received, rather than by reducing the price on the invoice. That distinction changes the arithmetic: a 10+1 scheme is not a 10% discount but 9.09%, because you pay for 10 and receive 11. Costing it the other way overstates your discount on every single unit.
Free goods do not reduce the price. They reduce the cost per unit — by increasing the quantity that the same invoice value is spread across.
That sounds like a distinction without a difference. It is not, and it produces the single most common arithmetic error in Indian trade: a 10+1 scheme is not a 10% discount. You pay for ten and receive eleven, so the free unit is one-eleventh of what you actually got. The effective discount is 9.09%.
Cost a 10+1 at 10% and you overstate your discount on every unit you ever buy under it.
The vocabulary
Four things travel under the same heading and behave slightly differently.
- Free goods — units shipped at no charge alongside a priced sale.
- Scheme goods — the Indian trade's usual term for the same thing when it arrives under a specific scheme: the free cases in a 10+1, the extra stock for hitting a target.
- Extra-quantity packs — more product inside the same pack at the same price, which is a manufacturing decision rather than a consignment one.
- Replacements — units shipped to make good damage, expiry or shortage. These are not a scheme benefit at all, and mixing them into scheme-goods totals inflates what you think you earned.
The first two are what this page is about. All of them share the same property: the value on the invoice does not move, and the quantity does.
The arithmetic everyone gets wrong
The rule is one line:
Effective discount = free ÷ (paid + free)
Not free ÷ paid. The unit you received for nothing has to be measured against everything you ended up holding, not against what you were billed for.
| Scheme | Effective discount | Quoted as (the common error) | Overstated by |
|---|---|---|---|
| 3+1 | 25.00% | 33.33% | 8.33 pts |
| 5+1 | 16.67% | 20.00% | 3.33 pts |
| 6+1 | 14.29% | 16.67% | 2.38 pts |
| 10+1 | 9.09% | 10.00% | 0.91 pts |
| 10+2 | 16.67% | 20.00% | 3.33 pts |
| 12+1 | 7.69% | 8.33% | 0.64 pts |
| 20+2 | 9.09% | 10.00% | 0.91 pts |
| 25+5 | 16.67% | 20.00% | 3.33 pts |
Two things worth reading out of that table.
The error grows with the scheme's generosity. On a 10+1 it is under a point, which is why it survives — nobody notices. On a 3+1 it is 8.33 points, which is larger than most distributors' entire gross margin. The schemes where getting it wrong costs the most are exactly the aggressive ones people are most excited about.
Ratios that look different can be identical. A 20+2 is the same 9.09% as a 10+1; a 25+5 is the same 16.67% as a 5+1. A supplier restating a scheme in bigger numbers has not improved it, and the only way to see that is to compute the percentage rather than compare the shapes.
What it does to your cost per unit
Take 100 cases invoiced at ₹95,000 under a 10+1, so 110 cases arrive. All figures illustrative.
Count the 100 you paid for and your cost looks like ₹950 a case. Count the 110 you actually received and it is ₹863.64.
That is a 9.09% reduction — the same 1/11, arriving as a cost saving rather than a discount line. And it matters well beyond tidiness: this is one of the nine components that turn an invoice price into what a case really cost you, worked through in net landing cost. Price off ₹950 when your true cost is ₹863.64 and you will decline business you could profitably win.
Why systems record scheme goods wrongly
Here is the mechanical reason the benefit so often disappears.
A free-goods consignment carries two facts that have to meet: a value (₹95,000) and a quantity (110). Most inventory and accounting systems store those in different places, and nothing forces them to agree.
Where it goes wrong is usually one of two patterns:
The free units arrive as a separate zero-value receipt. The system books 100 units against the invoice and 10 units against nothing. Both entries are individually correct. The cost per unit is overstated by 9.09% and no reconciliation will ever flag it, because nothing is out of balance — the error is in how the two records relate, not in either one.
The free units are never received at all. They arrive physically, get sold, and exist in no system. Now the stock ledger disagrees with the shelf, and the gap gets written off as shrinkage rather than recognised as scheme income.
The fix is unglamorous: record the full received quantity against the invoice value, so cost per unit falls out correctly on its own. A system that shows 110 cases against ₹95,000 gets this right automatically and forever. This is also why suppliers are often asked to show free scheme quantity on the sales invoice rather than dispatching it separately — it keeps the value and the quantity in one document.
Claiming and evidencing scheme goods
Where free goods are part of a claimable scheme rather than shipped automatically, the entitlement has to be provable.
The recurring failure is a consignment where free units shipped but were never referenced to the scheme that granted them. Months later the quantity is queried, and there is nothing tying those units to a circular — so the burden lands on the party with the weaker paperwork, which is almost always the distributor.
Two habits prevent most of it. Reference the scheme or circular number on the document that carries the free quantity. And keep the circular itself, because the scheme's terms are what decide whether returns reduce the qualifying volume, whether the free units count toward the next slab, and whether the entitlement lapses. What a complete claim file looks like is set out in documents required for a distributor scheme claim, and where free goods sit among the other Indian scheme types in FMCG trade schemes explained.
Tax is a separate question
Everything above is about what free goods cost you and how to record them. What they attract in tax is a different question with a different answer, and the answer depends on which kind of free goods they are — a BOGO pack, an extra-quantity pack, a true sample and a dealer reward are each treated differently.
That is worked through in GST on free goods, BOGO and quantity schemes. Do not read a costing rule off a tax rule, or the reverse; they answer different questions and it is entirely normal for the two to point in different directions on the same consignment.
The short version
Free goods are one of the few places where the money is genuinely already yours and the only risk is failing to notice it. There is no claim window to miss and no counterparty to chase — the units are in your godown.
What there is, is arithmetic. Compute the percentage against the total you received, record the full quantity against the invoice value, and reference the scheme on the document. Get those three right and the benefit shows up in your cost per unit by itself, which is the only place it was ever going to be visible.
Frequently asked questions
What is the percentage of a 10+1 scheme?
9.09%, not 10%. You pay for 10 units and receive 11, so the free unit is one-eleventh of what you actually got. The formula is free ÷ (paid + free). Costing a 10+1 at 10% overstates your discount on every unit and quietly inflates the margin you think you are making.
How do you calculate the discount on a free-goods scheme?
Divide the free quantity by the total quantity received, not by the quantity paid for. A 5+1 is 1 ÷ 6 = 16.67%, a 3+1 is 1 ÷ 4 = 25%, a 12+1 is 1 ÷ 13 = 7.69%. Dividing by the paid quantity instead is the common error, and it gets worse the more generous the scheme.
What are scheme goods?
Scheme goods are the extra units a supplier ships under a trade scheme rather than as a priced sale — the free cases in a 10+1, the extra quantity in a promotional pack, the additional stock granted for hitting a target. They arrive with the consignment but carry no price of their own.
Do free goods reduce the price or the cost?
The cost, not the price. The invoice value stays exactly where it was; what changes is how many units that value is spread across. That is why free goods never appear as a discount line, and why a system that records only the invoice will never see the benefit at all.
Why does my ERP show the wrong cost on scheme goods?
Usually because the value and the quantity were recorded in two places that never met. If the system books 100 units against the invoice and the 10 free units arrive as a separate zero-value receipt, both entries look correct in isolation while the cost per unit is overstated by 9.09%. Nothing flags it.
Are free goods taxable under GST?
That is a separate question from costing them, and the answer depends on what kind of free goods they are — a BOGO pack, an extra-quantity pack, a true sample and a dealer reward are each treated differently. It is worked through in our article on GST for free goods and BOGO schemes; confirm your position with a qualified professional.
How do you prove a free-goods entitlement when claiming?
By tying the free quantity back to the scheme circular that granted it and the invoice or delivery document that carried it. The recurring failure is a consignment where the free units were shipped but never referenced to a scheme, which leaves you unable to show why they were due if the quantity is later queried.
See RebateLedger on your own claims data
A 30-minute walkthrough tailored to how your channel actually settles claims.