Introduction
Goods in transit are vulnerable to loss, theft, and damage. When goods purchased with ITC are lost during transit, the question arises: Can the buyer retain the ITC, or must it be reversed?
The answer is clear: ITC must be reversed under Section 17(5)(h). This guide explains the legal framework, the Gujarat AAR ruling, and the compliance requirements.
Legal Framework: Section 17(5)(h) of the CGST Act, 2017
Blocked Credit on Goods Lost
Section 17(5)(h) blocks ITC on goods that are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. The provision applies to goods in transit, in warehouse, or in any other location.
No Exemption for Natural Loss
The provision does not prescribe a formula for calculation, nor does it offer relief based on the reason for destruction. Even natural loss during transport triggers ITC reversal.
The Gujarat AAR Ruling: INOX Air Products
The Gujarat Authority for Advance Rulings in M/s. INOX AIR PRODUCTS P LTD. (Case No. GUJ/GAAR/R/2025/10 dated 25.03.2025) clarified that natural loss during transport is not 'supply' under GST, but ITC reversal is still required under Section 17(5)(h).
The Madras High Court Exception
The Madras High Court has held that loss of input during the manufacturing process — where the input is consumed in the process — is not covered by Section 17(5)(h). ITC reversal is not required for such process loss.
Documentation Required
- Transit Loss Report: Documentation of the loss during transit.
- FIR or Police Complaint: For theft or pilferage.
- Insurance Claim: Documentation of insurance claims.
- Reversal Calculation: Computation of the ITC to be reversed.
- GSTR-3B Disclosure: Disclosure of the reversal in the appropriate table.
Best Practices
- Document All Losses: Maintain detailed records of every transit loss.
- Reverse ITC Promptly: Reverse ITC in the GSTR-3B for the period in which the loss occurred.
- File Insurance Claims: Pursue insurance claims for lost goods.
- Distinguish Process Loss: Where the loss occurs during manufacturing, document it as process loss.
- Seek Professional Assistance: Where the nature of the loss is ambiguous, seek guidance.
Conclusion
ITC on goods lost during transit must be reversed under Section 17(5)(h). The Gujarat AAR has confirmed that even natural loss during transport triggers reversal. Process loss during manufacturing is a possible exception. Proper documentation is essential.
Facing goods lost during transit? Anuj Desai & Associates provides expert guidance on ITC reversal and compliance. Contact us today.
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- Email: office@anujdesaiassociates.com
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