Credit on goods lost, stolen or destroyed: A lost cause?
1. With the advent of GST, owing to availability of credit on any goods or services used in business which is widely worded, many avenues of credit have been unlocked. Though the credit pool has been amplified, yet credit is subject to the restricted categories enumerated in the "negative list for credit", namely, Section 17(5) of the Central Goods & Services Tax Act, 2017.
One such category, which is expected to be an apple of discord between the department and assessee, is Section 17(5)(h) wherein credit on "goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample" is barred. The point of focus in this article is "goods lost, stolen or destroyed".
Whether credit on GST paid goods eventually lost stolen or destroyed is allowable
2. The moot point is whether the credit of all goods which are purchased on payment of GST and eventually lost, stolen or destroyed is disallowed by this entry or is it possible to carve out exceptions for goods which are put to use in business. For instance, Laminates used in packing destroyed after being found to be defective while unrolling such rolls for packing, floor sweepings emerging during manufacture being destroyed post manufacture within the factory.
Section 16(1), which is the touchstone for taking credit under GST law, allows the credit of all goods and services used by a person in the course or furtherance of its business. However, Section 17(5) starts with "notwithstanding anything contained in Section 16". The phrase "notwithstanding anything contained in Section 16", being a non-obstanteclause, indicates that the restrictions under Section 17(5) are not subject to the golden rule for taking credit under Section 16(1). A natural conclusion from this would be that regardless of whether the goods which are eventually lost, stolen or destroyed were used in the course or furtherance of business, the credit on such goods is barred.
It is worth examining similar provisions under the erstwhile VAT laws from which this entry under GST law appears to owe its origin. An examination of these VAT provisions reflects that the provisions under the various VAT laws differ in respect of reversal of ITC for goods which are lost, destroyed or damaged. While as some of the States required reversal where goods were not eventually sold due to the loss or destruction (Andhra Pradesh), other States required reversal where goods were lost or destroyed prior to manufacture or during manufacture (Tamil Nadu) or post manufacture (Bihar and Dadra). The provisions under the different States have linked to the loss or destruction to eventual sale and manufacture.
In the backdrop of the VAT provisions, Section 17(5)(h) requires reversal where goods are lost, stolen, destroyed without any reference to the manner of destruction or stage of destruction and without any linkage of such goods to the stage prior to manufacture. Consequently, the question is whether any such exception is indeed contemplated by the Legislature?
Another aspect worth noting is that other provisions under Section 17(5) carve out certain exceptions wherever the Legislature so deemed fit. By way of illustration, Section 17(5)(a) requires credit to be reversed in respect of motor vehicles and other conveyances, except when they are used for making certain specified taxable supplies. Such exceptions are indicative of the intention of the Legislature to provide specific situations where credit is not required to be reversed. The absence of such specific exceptions in the context of goods lost, stolen or destroyed indicates otherwise.
3. The above factors taken together lead to the conclusion that by way of Section 17(5)(h), the Legislature intended to deny credit where goods were destroyed, stolen or destroyed, irrespective of the manner in which such goods were destroyed, stolen or lost.
On the other hand, as an alternative argument, it is possible to argue that if the intention of the Legislature was to deny credit of goods which have been lost during the manufacturing activity or destroyed post manufacture, the same would have been categorically provided for in the CGST Act, as had been provided for in the erstwhile VAT legislations.
Additionally, on application of the principle of noscitur a sociis, meaning can be derived for the word 'destruction' from the specific context in which the words 'lost', 'stolen' or 'written off' is used. Typically, when goods are lost or stolen, it is not in the ordinary course of business and such loss of goods is not expected to occur in the general course of business. Owing to this, Section 17(5)(h) intends to disallow credit where goods, though purchased for use in business are not used for the business, yet use, i.e., in the manufacture or trading or use in provision of services.
The above facts reflect that two lines of interpretations are possible for determining coverage under this entry indicating that this is bound to be a major bone of contention between the department and the taxpayers.
Author : Rohini Mukherjee, Principal Associate (Lakshmikumaran & Sridharan)