Picture a distributor walking into a pharmacy and handing over 11 strips of Metformin 500 mg — 10 bought, 1 free under a scheme. The pharmacist's billing software creates one line: "Metformin 500 mg × 11 strips, ₹0 discount." The bill goes out. The GST return goes out. And somewhere in that transaction, the pharmacy has quietly misreported the taxable value of scheme goods, understated its purchase cost basis, and created a paper trail that does not match the distributor's own GSTR-1.
This is not a rare edge case. Picture a pharmacy with four active 10+1 schemes at once — Metformin, Pantoprazole, Cetirizine, and a surgical dressing — and every single one entered identically: quantity inflated, price deflated, no separate free-goods line, while the distributor's invoice shows a different structure entirely.
If your billing today looks anything like this, the gap between your records and your GSTR-2B is already growing. That gap can cost you ITC claims, trigger scrutiny notices, and in a physical inspection, produce a stock register that cannot be reconciled. That is the problem this post is going to fix.
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The Distributor's Invoice and Your Bill Are Saying Two Different Things
When a distributor offers a 10+1 scheme, they typically issue one of two invoice types. In the first — and more common — structure, the distributor bills all 11 units at full price and then adds a "free goods" or "scheme quantity" line for 1 unit at ₹0, with GST charged on the full 10-unit value only. In the second structure, some distributors consolidate the transaction and issue a credit note or separate challan for the free unit.
If your pharmacy software simply takes the distributor's quantity (11) and divides the total amount (10 × MRP) across all 11 strips, you have now recorded each strip at a lower per-unit cost than what was actually invoiced. Your purchase register, your inventory valuation, and your GSTR-2B reconciliation are all misaligned from the first moment.
The annual cost of this misalignment is easy to underestimate. A pharmacy with several active schemes can have dozens of scheme-affected purchase lines a month. Each line where the taxable value is wrong is a line where your ITC claim may not match the supplier's outward supply data — and matching ITC against supplier data is exactly what the GST system does.
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You Are Paying GST on the Wrong Taxable Value — and It Flows Into Your Returns
Under the current GST framework, most medicines under HSN 3004 attract 5%, in force since 22 September 2025 after the 56th GST Council — but the rate is not the issue here. The issue is the taxable value.
Free goods under a trade scheme are not zero-rated simply because the distributor gives them "free." If the supplier has charged no consideration for those units, no GST is charged to you on them. But if the distributor's invoice reflects GST charged on 10 units and delivers 11, your bill must match that structure — 10 taxable units, 1 free unit on a separate line.
When you collapse both into one line at a blended per-unit cost:
- Your taxable purchase value is understated relative to the distributor's outward supply
- Your ITC claim becomes difficult to defend in a GST audit
- Your COGS calculation for the free unit is invisible, distorting your margin reports
The reconciliation gap per scheme line is small. Across dozens of scheme lines a month for twelve months, it becomes real ITC exposure, not counting the cost of the CA or consultant who eventually has to clean it up.
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Your Stock Register Cannot Explain Where That Extra Unit Came From
Here is the problem that surfaces during a Drug Inspector visit. Your purchase register shows you received 11 strips. Your invoice — if correctly entered — should show 10 strips purchased and 1 strip received as a scheme unit. If your software has no concept of "free quantity" as a distinct entry type, your stock register simply shows 11 strips arriving under one purchase value.
Under D&C Rules Rule 65, every Schedule H and H1 supply must be recorded with its batch number, and Schedule H1 supplies go in a separate register kept for three years — so your purchase records have to show where each batch came from: the quantity received, the invoice reference, and the supplier. A register that shows a blended quantity with no distinction between purchased and scheme goods is not reconcilable with the distributor's invoice.
Selling a Schedule H1 drug without a prescription is punishable under Section 27(d) of the Drugs and Cosmetics Act, 1940, with imprisonment of one to two years and a fine of not less than ₹20,000. Records that cannot be reconciled are the first thing an inspection turns up.
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What the Bill Should Actually Look Like
A correctly structured pharmacy purchase entry for a 10+1 scheme has two distinct components, not one blended line.
| Line | Item | Qty | Rate | Taxable Value | GST | Total |
|---|
| 1 | Metformin 500 mg (HSN 3004) | 10 | ₹85.00 | ₹850.00 | 5% | ₹892.50 |
| 2 | Metformin 500 mg — Scheme Qty (HSN 3004) | 1 | ₹0.00 | ₹0.00 | 0% | ₹0.00 |
Your GSTR-3B and purchase ledger reflect ITC on ₹850 taxable value only. Your stock register shows 11 units received — 10 purchased, 1 scheme — which matches the distributor's invoice. Your inventory values the scheme unit at cost for the purposes of expiry tracking and FEFO batch rotation, even though it was received free.
When operations run this way, a GST audit becomes a documentation exercise rather than a damage-control exercise. Your returns match your purchase register. Your purchase register matches the distributor's GSTR-1. The inspector can follow the paper trail in both directions and arrive at the same number every time.
A pharmacy that reconciles its past scheme entries against this structure will usually find ITC it missed, because blended entries underreport the taxable purchase value on the paid units.
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How Nesayo Handles a Scheme Purchase
Picture a neighbourhood pharmacy running Nesayo receiving the same 10+1 distributor scheme. On Nesayo's purchase entry, each line has its paid quantity and a separate Free units field, so the pharmacist enters 10 paid and 1 free. When the purchase is read from a photo of the distributor's invoice, the scheme ("Sch") column is picked up as free units too, for the pharmacist to check before confirming. The amount and the GST are worked out on the 10 paid units only, and all 11 go into stock.
All 11 units enter the inventory under the same batch, the same expiry date, and the same FEFO rotation — so when that batch approaches expiry, it shows up in the expiry alerts, and on the AI Employee plan the Expiry Guard agent puts it in the Morning Briefing. Confirmed purchases go into Nesayo's purchase register with tax worked out line by line, and on the AI Employee plan the Tally export carries them to your CA with their HSN codes.
The catalogue of 2,54,034 medicines in Nesayo means the Metformin entry is pre-populated with its HSN code and GST rate, and an advisory schedule — the pharmacist is not manually looking up whether a medicine is Schedule H or H1 before making the purchase entry.
The scheme entry stops being careful manual splitting and becomes two numbers on one line. The GST reconciliation stops producing unexplained ITC variances from scheme lines. And when those units are sold, Schedule H1 sales are logged at billing with the batch (the pharmacist adds the prescriber's address), instead of in a separate notebook or Excel file.
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The Choice in Front of You Right Now
Every month you continue billing 10+1 schemes as a single blended line is a month where your GSTR-2B and your distributor's GSTR-1 are telling different stories to the GST portal's matching system. The portal's reconciliation engine flags these differences. Notices follow patterns. Patterns that persist across 12 months attract more than a notice.
The fix is not complicated. The structure is clear, the regulation is explicit, and the software to handle it correctly exists. What it requires is a billing system that understands the difference between "quantity purchased" and "quantity received under scheme" — and records both, correctly, without the pharmacist having to manually split every scheme invoice.
Spend 2 minutes at nesayo.com/demo — a sample pharmacy is pre-loaded, no signup required. Look at how stock, batches and GST sit together, then compare that with how your current system records a scheme.
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FAQ
How should free goods from a distributor scheme appear on a GST invoice?
Free goods under a trade scheme should appear as a separate line item on the invoice with quantity, HSN code, and ₹0 as the taxable value. GST is charged only on the paid quantity. If both quantities are merged into one line at a blended rate, the taxable value reported in GSTR-3B will not match the supplier's outward supply data in GSTR-1, creating an ITC mismatch.
Does the pharmacy need to pay GST on scheme goods received free from a distributor?
Generally, no — if the distributor has not charged GST on the free quantity, the pharmacy does not owe GST on the scheme unit. However, the specific treatment depends on how the distributor has structured the invoice. Verify with your CA and cross-check against the distributor's invoice before filing. Do not assume the billing software has handled this correctly without checking the output.
What is the correct HSN code for medicines received under a 10+1 scheme?
The HSN code does not change because a unit is received free. Medicines — whether paid or scheme — typically fall under HSN 3004 (medicaments consisting of mixed or unmixed products for therapeutic or prophylactic use). The scheme unit should carry the same HSN as the paid units on the same invoice.
Can I claim ITC on the free quantity received under a distributor scheme?
No, typically you cannot. ITC is claimable only on GST actually paid. Since the free unit is received at ₹0 with no GST charged, there is no ITC to claim on that unit. Attempting to claim ITC on the free quantity would overstate your credit and create a discrepancy with the supplier's GSTR-1. Confirm the specific treatment with your GST consultant.
What happens if my purchase register does not match the distributor's invoice during a Drug Inspector visit?
Under D&C Rules Rule 65, your purchase register must accurately reflect quantities received and their invoice references. If a scheme unit appears in your stock but cannot be traced to a documented entry — or if the quantities are blended in a way that does not match the distributor's invoice — the register may be considered non-compliant. Every Schedule H and H1 supply must also be recorded with its batch, which only works if the stock that arrived is on the books correctly. Maintaining a clear, separable entry for scheme goods protects you in an inspection.
How do I record a 10+1 scheme in my GSTR-3B and purchase ledger?
In GSTR-3B, report ITC only on the taxable value of the 10 paid units. In your purchase ledger, create two entries under the same invoice reference: one for the 10 purchased units with the applicable GST amount, and one for the 1 scheme unit at ₹0 with nil GST. Both entries should reference the same distributor invoice number and batch details. Your CA can confirm the exact ledger head structure appropriate for your accounting setup.
Does billing software need to have a separate "scheme quantity" field, or can I handle this manually in Excel?
You can handle it manually in Excel, but the risk of error across dozens of scheme lines a month is high, and Excel does not connect the purchase to your stock, your batches or your GST reconciliation. A billing system with a dedicated free-quantity field reduces per-entry time and produces a purchase register that needs no additional cleanup. Whether you use software or Excel, the two-line structure is not optional — it is what the GST invoice format and purchase register requirements expect.