Reversal of ITC on goods (raw materials) if Finished Goods gets destroyed

Whether Reversal of ITC availed on goods (raw materials) required, if Finished Goods gets destroyed?

The CGST Act, 2017 (the said Act) read with respective State GST Act(s), has been enacted with one of its main objectives being to ensure a continuous flow of input tax credit at each stage of value addition. In this regards, certain relevant provisions of the said Act have been produced below for reference.

Section 16(1) states that “every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.”

Section 2(59) defines ‘input’ to mean “goods other than capital goods, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business.”

Section 2(19) defines ‘capital goods’ to mean “goods the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.”

Section 2(55) defines ‘input service’ to mean “any service, used or intended to be used by a supplier for making an outward supply in the course or furtherance of business;”

Section 2(17) defines the term ‘business’ to include: –

• any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

Thus, the term business has been defined in the said Act, to expansively include inter alia manufacture also.

Now, Section 17(5) of the said Act comes into action by restricting the above flow of ITC i.r.o certain transactions / activities which reads as follows:

(5) 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;

 The above provisions on a collective reading brings certain points that has been summarized below:

• The definition of inputs, input services and capital goods use a common phrase “used or intended to be used in course or furtherance of business”.
• Section 16(1) states that ITC shall be availed if goods/services are “used or intended to be used in course or furtherance of business.”
• Business includes manufacture.
• Goods destroyed or stolen or lost – ITC shall not be available as per Sec 17(5)(h)
• Sec 17(5)(h) does not uses the phrase “used or intended to be used in course or furtherance of business”.

Thus, section 17(5)(h) does not restricts the availment of ITC of goods to the extent if they are used or intended to be used in course of furtherance of business, i.e., used in manufacture of finished goods. The section is very crystal clear and straight forward to disallow the credit of tax paid on those goods only, which are destroyed or lost or stolen. Once the goods (raw materials) are utilized in manufacture of finished goods, they have been used in course or furtherance of business. Now, if the finished goods gets  destroyed, then by no stretch of imagination it can be held that the raw materials got destroyed. WHAT IS DESTROYED, IS FINISHED GOODS and NOT THE RAW MATERIALS.

The said section nowhere states that credit i.r.o goods (raw materials) which have been utilized for manufacture of finished goods shall be reversed, if the finished goods gets destroyed. It is worthwhile to provide here that once the ITC has been availed legitimately, the same cannot be asked for reversal without any specific provision in this regard. Rather, there is no provision at all in the said Act, which calls for reversal of credit of input tax of those goods(raw materials) which have been already consumed in manufacture of finished goods which subsequently got lost, damaged or destroyed.

Therefore, No ITC is required to be reversed in such a case.

Disclaimer: The views, expressions, opinion is solely an interpretation of the author and does not assures of the correctness of interpretation. The author reserves the right not to be responsible for the topicality, correctness, completeness or quality of the information provided above in this article.