ITC on damaged product

Hi Parinita,

In your case, since the finished goods were damaged in transit and subsequently returned, and you issued a credit note reversing the output tax on the original sale, here’s the GST treatment for ITC on raw materials used:

Key points:

1. Reversal of ITC on raw materials used in damaged goods is required if the goods are written off or not used for making taxable supplies.

2. Since you sold the damaged goods as scrap @ 5% GST, and received insurance proceeds, the goods still generated some taxable supply, though at a lower rate.

ITC reversal calculation:

• You need to reverse ITC proportionate to the scrap value because the original raw materials are no longer used for making taxable supplies at the original value.

• The reversal should be proportionate to the quantity of scrap sold or the scrap value, not the entire raw material quantity used.

• The insurance claim amount is a recovery and not a supply, so GST is not applicable on insurance proceeds; however, the ITC reversal should be based on the quantity of goods scrapped or the value of scrap.

Practical approach:

• Reverse ITC on raw materials corresponding to the quantity of goods scrapped.

• If the scrap value is significantly lower than the original cost, reversal should be on the difference.

• You can also calculate ITC reversal on the basis of the percentage of the damaged quantity relative to total production.

Summary:

• Yes, ITC reversal is required on raw materials.

• The reversal amount should be proportionate to scrap quantity or scrap value.

• The insurance proceeds do not attract GST and are not included in ITC reversal calculation directly.

Suggestion: Consult a GST expert with your exact input costs and quantities to compute the precise ITC reversal.