GST ITC Reversal: Fire, Theft & Damaged Goods

ITC Reversal – Goods affected by fire, theft or similar incidents

Section 17(5)(h) of the CGST Act

Section 17(5): Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following:

(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

This directly restricts ITC on goods affected by fire, theft or similar incidents.

1.Raw Material – ITC Reversal

• The input tax credit on raw materials and packaging materials in inventory must be fully reversed.

2. Work-In-Process – ITC Reversal

• ITC attributable to the inputs (raw materials) and input services used in the manufacture of these goods must be reversed.
• Method: Determine the input and input service cost embedded in the WIP goods in pipeline that was destroyed.
• Use the cost accountant’s valuation or the cost sheets to segregate input/input service components.
• Reverse the ITC of that proportion either through:
  • Proportionate method, or
  • Direct tracking, if specific input invoices are linked to the destroyed stock.

3. Finished Goods – ITC Reversal

• ITC attributable to the inputs (raw materials) and input services used in the manufacture of these goods must be reversed.
• Method: Determine the input and input service cost embedded in the finished goods stock that was destroyed.
• Use the cost accountant’s valuation or the cost sheets to segregate input/input service components.
• Reverse the ITC of that proportion either through:
  • Proportionate method, or
  • Direct tracking, if specific input invoices are linked to the destroyed stock.

v Not allowed:

You cannot directly calculate reversal as:

Finished goods value × GST Rate

This is not correct as per GST law. GST is not reversed based on selling price.

v Example:

• Finished Goods destroyed: 100 units
• Per unit raw material cost = ₹100
• Per unit input services cost = ₹20
• Total = ₹120 per unit
• ITC on raw materials = 18% of ₹100 = ₹18 per unit
• ITC on input services = 18% of ₹20 = ₹6 per unit
• Total ITC to reverse per unit = ₹6
• For 100 units: ₹6 × 100 = ₹2,160

4. Capital Goods (Plant & Machinery, Building etc.) – ITC Computation on Reversal

• ITC needs to be reversed on pro rata basis as per Rule 44(1)(b) of the CGST Rules.
• The useful life of capital goods is considered 5 years (60 months) from the date of purchase.
  • Computation:

Reversal Amount = Total ITC × Remaining useful life in months / 60 ​

• Illustration provided in the rule:

Capital goods have been in use for 4 years, 6 months and 15 days. The useful remaining life in months = 5 months (ignoring part of the month).
Input tax credit attributable to remaining useful life = C × (5/60),
where C = ITC taken on such capital goods.

You may use excel DATEDIF function

=DATEDIF(start_date, end_date, “M”)

Key Explanation

• The GST law and Rule 44 use “date of invoice” (i.e., when the goods are received/purchased) to begin the 5-year calculation, not the date they are capitalized in the books.
• This ensures that even if there’s a delay in capitalization, the 5-year period starts from the invoice date, and not from the later accounting entry.
• If a capital good has been used for 10 month 28 days, it is treated as 10 full month only. The 28 days are ignored — they do not round up to the next month. and ignoring a part of the month.
• The ignoring part-month rule applies only when computing the remaining useful life, not when computing the used period.

Example:

• Start Date: 16 October 2021
• End Date: 8 May 2025
• Duration: 3 years, 6 months, and 22 days

 So the calculation is:

• Count full months from 16 Oct 2021 to 15 April 2025 = 42 months
• Since 15 April 2025 to 8 May 2025 is not a complete month, May 2025 is not counted.
• So, used = 42 months
• Remaining life = 60 – 42 = 18 months

Ø  Reverse in GSTR-3B

Use Table 4(B)(2) of GSTR-3B to declare the reversal amount.

Ø  Pass an Accounting Entry

Use this simple journal entry format:

Loss of Stock A/c    Dr.

To Input Tax Credit (CGST / SGST / IGST)

References:

1.Section 17(5)(h)

2. Rule 44(1)(b) of the CGST Rules.

3. Circular No 92/11/2019-GST

Clarification on various doubts related to treatment of sales promotion schemes under GST [Circular No 92/11/2019-GST]