ITC Reversal on Perishable Goods Destroyed Due to Force Majeure — A GST Analysis

CA Shantanu Bagwe
1 day ago
4 min read

The ongoing geopolitical tensions in the Middle East have disrupted trade routes and forced several Indian exporters into an unenviable position — watching their manufactured goods perish in warehouses, unable to ship them to their intended destinations. For exporters of perishable food items, this is not merely a commercial loss; it raises a critical question under the GST framework: what happens to the Input Tax Credit (ITC) already claimed on the inputs used to manufacture goods that must now be destroyed?

As a firm advising exporters and manufacturers across industries, we have been receiving this question with increasing frequency. This article breaks down the legal position, the judicial precedents, and the practical steps that affected businesses must take.

The Legal Position: Section 17(5)(h) of the CGST Act

The answer, unfortunately, is straightforward — and unfavourable for the taxpayer.

Section 17(5)(h) of the CGST Act, 2017 states:

"Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely — ... (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples."

The provision is clear: when goods are destroyed, the ITC claimed on the inputs and input services used in their manufacture must be reversed. There is no ambiguity in the language, and no carve-out based on the reason for destruction.

Does This Apply to Finished Goods? Yes.

A common misconception is that Section 17(5)(h) applies only to raw materials or inputs that are destroyed — not to finished goods. This interpretation has been decisively rejected by judicial authorities.

In Geekay Wires Ltd. (AAAR-Telangana), finished goods (steel nails) were destroyed in a fire. The Appellate Authority for Advance Ruling held that Section 17(5)(h) squarely applies to finished goods. The ruling noted that the provision is "simple, clear and unambiguous" and does not restrict its application to inputs alone. Where finished goods are destroyed, the ITC attributable to the inputs consumed in their manufacture must be reversed.

Similarly, in Inox Air Products (P.) Ltd. (AAR-Gujarat), industrial gases were lost during transit due to evaporation. The Authority held that since the goods were lost before a taxable supply could be completed, the condition under Section 16(1) — that goods must be used in the course or furtherance of business leading to a taxable supply — was not met. The ITC was held inadmissible under Section 17(5)(h).

It is worth noting the distinction drawn in ARS Steels & Alloy International (P.) Ltd. v. State Tax Officer (Madras High Court), where the Court held that ITC reversal is not required for normal manufacturing process losses. However, the destruction of finished, marketable goods due to an external event — such as the inability to export due to war — falls squarely within the ambit of "goods destroyed" under Section 17(5)(h).

The Force Majeure Question: No Relief Available

This is where many exporters hope for a reprieve — and where the law offers none.

The critical feature of Section 17(5) is its opening non-obstante clause: "Notwithstanding anything contained in..." This means the restriction operates independently and absolutely. The trigger for ITC reversal is the event of destruction itself, regardless of whether the underlying cause was within the taxpayer's control.

War, natural disasters, pandemics — none of these constitute grounds for exemption under the current GST framework. The CGST Act does not contain any force majeure provision that exempts taxpayers from ITC reversal obligations. Until such time as the legislature or the GST Council introduces a specific notification or amendment, the legal position remains firm.

How to Reverse ITC: The Process

The ITC reversal must be effected through Form GST DRC-03, by debiting the appropriate amount from the Electronic Credit Ledger or, if credit is insufficient, from the Electronic Cash Ledger. The reversal should be computed by identifying the ITC attributable to the inputs and input services consumed in the manufacture of the destroyed goods.

Alternatively, Taxpayers can also reverse ITC in the GSTR-3B return for the relevant period and maintain a clear working paper showing the computation methodology.

Documentation: Your Best Defence

While the ITC reversal is mandatory, proper documentation can protect the taxpayer from disputes over the quantum of reversal and demonstrate good faith compliance. We recommend maintaining the following:

Intimation to Jurisdictional Officer: A formal letter to the jurisdictional GST officer, filed before the destruction, stating the reason, proposed date, time, and location of destruction.
Detailed Inventory: A comprehensive statement listing the goods to be destroyed — including HSN codes, quantities, book value, and the corresponding input invoices with ITC amounts.
Destruction Certificate: A formal certificate signed by authorised company personnel and, ideally, independent witnesses.
Photographic and Video Evidence: Clear documentation of the goods before, during, and after the destruction process.
Supporting Correspondence: The original export order, communications with the buyer, shipping line advisories, and any government notifications regarding the war situation — all filed together as a cohesive evidence package.

Practical Advisory for Affected Exporters

From a practical standpoint, exporters facing this situation should act swiftly. Do not wait for the goods to expire and then scramble for documentation. The moment it becomes clear that export will not be possible within the shelf life of the goods, begin the documentation process. Inform the jurisdictional officer, prepare the inventory, and arrange for witnessed destruction with full video recording.

Additionally, explore whether any portion of the goods can be salvaged through domestic sale — even at a reduced price. A taxable domestic supply, even at a discount, is preferable to destruction from a GST perspective, as it preserves the ITC chain.

Finally, maintain all records for a minimum of six years from the due date of filing the annual return for the relevant year, as prescribed under Section 36 of the CGST Act.

This article is for informational purposes only and does not constitute legal or tax advice. Readers are advised to consult their tax professionals for advice specific to their circumstances.

The author is a Chartered Accountant from Gracia Global Advisory LLP, a professional services firm specialising in GST, Income Tax, and business advisory.