Query on ITC Reversal on Insurance Claim of Sales of Goods

Hi Subrata,

Your situation is quite common in manufacturing and logistics-heavy sectors, and your question about ITC (Input Tax Credit) reversal in the case of damaged goods partially recovered via insurance and scrap sale is very relevant under GST law.

Let’s go step by step.

🔹 Scenario Summary:

• You sold goods @ 18%, but they were damaged in transit.

• The goods were returned, a credit note was issued, and output GST was reversed.

• The goods could no longer be sold as finished goods, so you sold them as scrap @ 5% GST.

• You also received partial compensation from the insurance company, without GST (insurance claim amount).

• Now, you're wondering whether and how much ITC on raw materials used in those goods must be reversed.

🔍 GST Law Position:

🔸 1. Section 17(5)(h) of CGST Act – Blocked Credit:

ITC shall not be available on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.

🔸 2. Rule 42 & 43 – Input Tax Credit Reversal Mechanism:

When goods are used partly for taxable supply and partly for exempt/non-GST/personal use, proportionate reversal is required.

✅ Key Considerations in Your Case:

✅ 1. Goods were not destroyed or lost completely:

• You managed to recover the goods and sold them as scrap.

• Hence, Section 17(5)(h) (blocked credit) does not fully apply, since there’s a taxable supply (scrap sale).

• You are also paying GST @ 5% on scrap, so that part is fully eligible for ITC.

✅ 2. Insurance claim is not a supply, hence not taxable, and not eligible for ITC.

• The amount received from the insurance company is not subject to GST, and no GST is charged on it.

• Therefore, that portion of goods is deemed non-taxable supply, and hence ITC proportion needs to be reversed.

🧮 So, How to Calculate ITC Reversal?

You need to reverse ITC proportionate to the insurance claim amount, as that part of the goods did not result in a taxable supply.

🔹 Formula (Simple Approximation):

Let’s say:

• Total cost of goods: ₹100

• You originally availed ITC of ₹18 (18% on ₹100)

• Scrap value (taxable): ₹20 (on which you pay 5% GST)

• Insurance claim: ₹60 (not taxable, not liable for GST)

• Balance loss: ₹20

You need to retain ITC for the ₹20 scrap sale (i.e., 20% of the goods resulted in taxable supply).

So, proportion of non-taxable supply (insurance) is 60%, and on this, ITC must be reversed proportionately.

🔹 ITC to Reverse = ₹18 × (Insurance Amount ÷ Total Value)

₹18 × (₹60 ÷ ₹100) = ₹10.80 to be reversed

✅ Final Answer:

Yes, you need to reverse the proportionate ITC to the extent of the goods covered under the insurance claim, i.e., the value received without GST.

You can retain ITC corresponding to the scrap sold with GST.

📝 Recommendation:

Maintain detailed documentation:

• Credit Note for return

• Scrap sale invoice

• Insurance settlement letter

• ITC reversal working paper (in case of audit)