Reversal of ITC in case of goods lost by fire

In GST regime, the scope of definition of inputs, capital goods and input services is very wide and covers almost all the imaginable goods and services that are directly or indirectly used in course or furtherance of business. However, section 17(5) prescribes a list of goods or services on which ITC is not admissible. The opening para of section 17(5) of CGST Act, 2017 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:-

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(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;"

The bare analysis of above section makes it clear that this section has overriding effect and it states that the ITC shall not be available in respect of goods lost, stolen, destroyed or written off.

There is a school of thought which opines that the section 17(5) imposes the restrictions on the inputs or capital goods or input services on which ITC is straight forward denied. This section does not talk of the cases wherein the said inputs, capital goods or input services have already been utilized for further production of final products. In other words, this school of thought is of opinion that the question of reversal will arise only if the inputs or capital goods are themselves lost, stolen or destroyed. In their opinion, if the finished goods are destroyed, lost or stolen; the reversal will not be required.

There is another school of thought which believe that the reversal in case of loss or damage of finished goods will also be required. In their view, since the said inputs and capital goods have been used in manufacture of finished goods that have been destroyed; the same are not used in course or furtherance of business. Therefore, the ITC shall not be allowed on the same.

By analyzing both the views, the authors of this update find that the definition of inputs and capital goods use the phrase "used or intended to be used in course or furtherance of business". Since this condition is to be checked at the time of admissibility of ITC and at that time the goods lost, stolen or destroyed were intended to be used in course or furtherance of business, the ITC was legally availed. It is worthwhile to mention here that once ITC is legitimately availed, it cannot be demanded back without a specific provision in this regard. There is no provision for demanding the ITC on inputs, capital goods and input services that have already been used for the manufacture of finished goods that are lost or stolen or damaged. There is only one provision under clause (h) of section 17(5) of CGST Act, 2017 which talks of reversal on inputs or capital goods or input services itself. Further, there is no such provision of reversal under rule 42 of CGST Rules, 2017. In absence of any specific provision for demanding back the ITC on already consumed inputs or capital goods or input services, the same cannot be reversed.

Also, it is worthwhile to mention here that under Central Excise Regime, there was specific provision for reversing the cenvat credit availed on inputs contained in finished goods lost as well as availing the remission of duty. This was due to the fact that the excise duty was levied on the "manufacture". Since the liability had already arisen, the remission was to be taken and credit already availed was required to be reversed in view of the specific provision. There is no such provision in GST regime. Also, the liability is linked with "supply" rather than "manufacture". Since the liability to pay tax arises on "Supply" and there theft, loss by fire, etc. do not fall in the definition of "supply". Therefore, in view of this, the reversal of tax on the ITC cannot be demanded on the input content in the finished goods lost or destroyed.