Perishable goods lost, destroyed, written off because of Covid19 – Will you get GST ITC Refund?

Introduction

Due to the current situation it is obvious that there has been an impact on the suppliers of perishable goods. The major impact is specifically on the food processing sectors, textiles, grocery and other farm items where the nature of goods are perishable. These sectors will now be facing a situation where, higher tax is to be paid due to inventory loss now being compounded with the reversal of Input Tax Credit. 

Impact of ITC of Perishable Goods

In accordance with the provisions of the GST Law there is no credit available for goods lost, stolen, destroyed or written off or disposed by way of free samples. Thereby in such cases where the perishable  goods inventory are obsolete or no longer in use there will be reversal of ITC. The decay of perishable goods being a slow process there are more chances of reduction in value due to partial decay. This leads to a forced sale at a lower price than the actual price by the business.

For E.g. Mr. Mohan sales goods at Rs, 200 normally, and purchases the same at Rs 130. But due to partial decay the final value of product for sale has reduced to 100. Now the question arises if  Mr. Mohan can claim full ITC of Rs 130 or not?

We will understand the above example with the provisions of law highlighting the concept of block credit

What is block credit?

Although you have paid GST while making a purchase but due to certain conditions you are restricted and not allowed to claim the same. The GST which is paid during purchase but cannot be claimed are called blocked input tax credit and are covered under section 17 (5) of the CGST Act, 2017

Relevant Section

Section 17 (5) of CGST Act

ITC is not available in some cases as mentioned in section 17(5) of CGST Act, 2017. Some of them are as follows:

a. motor vehicles and other conveyances except under specified circumstances;

b. goods and/or services provided in relation to;

i. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except under specified circumstances;

 ii. Membership of a club, health and fitness center;

iii. Rent-a-cab, life insurance, health insurance except where it is obligatory for an employer under any law;

iv. Travel benefits extended to employees on vacation such as leave or home travel concession;

c. Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;

d. Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

 e. Goods and/or services on which tax has been paid under composition scheme;

 f. Goods and/or services used for private or personal consumption, to the extent they are so consumed;

g. Goods lost, stolen, destroyed, written off, gifted, or free samples;

 h. Any tax paid due to short payment on account of fraud, suppression, mis-declaration, seizure, detention.

From the above it is clear that Input tax credit shall not be available on goods  lost, stolen, destroyed, written off, gifted, or free samples and therefore perishable goods fall under this ambit and shall denied the claim of Input tax credit.

Cautions to be considered

1. If ITC is availed on such Invoices there are chances of facing demand with the  department.
2. You are advice to maintain records about such invoices and frame business policies so as to approve such tax positions.

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