Eligibility of input tax credit in case of partial damage goods or goods sold at a reduced price
Is there is any requirement of reversal of input tax credit in a case where goods were partially destroyed or sold at reduced price? – let us review the provision of GST law and a recent judgement for a better understanding
As per Section 17(5) of CGST Act no input credit is allowed for the goods “destroyed or Lost”
Relevant Extract of Section 17(5)(h) of the CGST Act 2017 is reproduced below.
Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
Dictionary meaning of destroyed is as under
“to damage something so badly that it cannot be used:”
(Ref- https://dictionary.cambridge.org/dictionary/english/destroy)
Some of the examples of words destroyed is as under
- Most of the oldpart of the city was destroyed by bombs during the war.
- Many important historical documents were destroyed in the fire.
- In 1906 an earthquake destroyed much of San Francisco.
- A bomb fell on the church and destroyed it.
As per my understanding/interpretation the words used by the law maker in continuation is goods “lost” “destroyed” & “written off”””……..
In all the case referred in GST Law goods has been completely vanished or cannot be used further.
No-where it is mentioned in the law that goods were partially lost, destroyed etc.
So the requirement of Input reversal is only applicable in the case of complete loss of goods not in the case of partial loss.
Partially lost goods still are marketable and having a fair market value and only sold at some reduced price. So there is no such reversal of ITC is required.
If someone take an argument that price reduction is taken place because of proportionate destruction in brand value of goods and portion of goods is destroyed and input should be reversed
To handle this situation I have taken an example to bring more clarity
If we sell a branded shirt/trouser/other item at a reduced price because of many reason such as minor defect, age of product etc. it cannot be said that the product has lost his brand value or there is destruction in brand value. This shirt/trouser/other item is always sold as such only at a reduced price because of the above mentioned reasons.
Similarly whole ecommerce industry is working of on the same line sold their products at some reduced price because of multiple reasons.
There is no condition in GST law to reverse the input credit in such a scenario so as per my understanding there is no need to reverse any input credit if we are further supplying these goods and GST is paid on the same.
I would like to mentioned one recent case law of “Toplink Motorcar Private Limited (GST AAR West Bengal)” in this case it was held by AAR Authority that
The provisions of the GST Act nowhere specifies that input tax credit shall not be available in respect of any outward supplies which is made at a price lower than its procurement value.
Further to this, generally pricing of any product is also done considering these cases and normal wastage. So eventually this normal wastage cost is already marked up in the price generally charged for a final product and GST is paid on the same to the Government including the normal loss.
Disclaimer :- The information provide above are personal view of the author and just for knowledge sharing purpose, and should not be used as a basis of decision making without taking an further professional advise.
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