Input Tax Credit (ITC) on Destroyed Goods What You Must Know
ITC on destroyed goods has been a hot topic in GST audits and departmental queries. Many businesses are unaware that GST law mandates reversal of ITC if inputs are used for manufacturing goods that are later destroyed, lost, or disposed of as per specified conditions.
Let’s break this down in a clear, compliance-friendly format.
When Must ITC Be Reversed?
As per Section 17(5)(h) of the CGST Act, 2017, ITC is not available on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
If you’ve already claimed ITC on such inputs, you must reverse it in your next GSTR-3B.
Typical Scenarios Requiring Reversal
- Fire accidents damaging finished goods in warehouse
- Natural calamities like floods destroying stock
- Inputs wasted during production or testing
- Goods written off due to expiry or quality issues
Legal Basis: Section & Case Law
| Legal Provision / Case | What It Says |
|---|---|
| Section 17(5)(h), CGST Act | Disallows ITC on destroyed goods |
| CCE v. Biopac India Corporation Ltd. (2019) | Upheld denial of credit on goods destroyed in fire |
| Circular No. 91/10/2019-GST | Clarified reversal required on write-off or destruction of goods |
Even in cases where finished goods are destroyed, ITC on inputs or input services used to manufacture them must be reversed, unless covered under insurance with tax implications managed properly.
How to Reverse ITC in GSTR-3B
- Identify the inputs related to destroyed goods
- Calculate the exact ITC amount availed
- Declare the amount in Table 4(B)(2) of GSTR-3B under “ITC reversed”
Pro Tip: Maintain documentation (e.g., FIR, insurance report, internal destruction memo) to support the reversal in case of departmental scrutiny.
Expert View
“ITC reversal on destroyed goods is often missed in internal audits. Businesses should map input-output flow and inventory wastage quarterly to avoid future notices.”
— Akhil Jain, GST Consultant
Summary
ITC on destroyed goods must be reversed under Section 17(5)(h) of the CGST Act. This applies when inputs or finished goods are lost, damaged, or written off. Declare reversal in GSTR-3B Table 4(B)(2). Keep documentary proof for audit.
Frequently Asked Questions (FAQs)
Q1: What if the goods are insured?
Insurance claim settlement doesn’t waive ITC reversal. Tax credit is to be reversed unless goods are taxed again.
Q2: Does this apply to services too?
Section 17(5)(h) covers goods only, not services.
Q3: What if the finished goods are semi-processed or WIP?
Yes, reversal applies even for WIP (Work-in-progress) if inputs are traceable.