INVENTORY -PROVISION FOR WRITE OFF IN BOOKS OF ACCOUNTS

[Nash Industries I Pvt Ltd]

Section 17(5)(h) of the CGST Act, 2017 says that the ITC is not allowed if the stock is written off in the books of accounts.

Rule 3(5B) of Cenvat Credit Rules says that the Credit is to be reversed if the stock is written off fully or partially or provision is made in the books of accounts partially or fully.

Further, the CCR provided the recredit of credit reversed already whereas there is no such provision in the GST.

There is a difference in the two provisions.

Whether this omission is a unintentional or delibrate?

Whether the ITC is to be reversed in case if provision is made to write off in the books of accounts.

If this is an unintentional omission and the law is rectified (if) whether it will be considered as clarificatory and shall have an retrospective effect or prospective effect?

If the issue is raised during audit and is litigated ,what is the chances of success for the assessee ?

The recent judgment of the Supreme Court has held that in case of ambiguity, the case will be tilted towards revenue.

What will be the impact of this Supreme Court decision in this matter?

Regards

S.Ramaswamy

[Ganeshan Kalyani]

As you have seen since the implementation of GST, there are so many notifications , circular, clarifications etc which indicates the law is evolving. The omission may be intentional or may be mistake. But as of the law is clear that only if stock is written off in the books it has to be considered for reversal of credit. If you differ with my view, kindly share sir.

[Nash Industries I Pvt Ltd]

Thank you sir for your views. Hitherto, the benefit of doubt is to be given to the assessee and not the revenue. The latest Apex Court ruling has reversed the same. It is the same old officers in the department whose mind set is yet to change and will err on the revenue side and issue notice for the same. From the plain reading, it is not includible. However, with the litigation, the Govt can either provide an explanation stating that the words : written off includes provision to write off.

In such a case, if considered clarificatory has a retrospective effect or if considered as an amendment then it has prospective effect.

The sword hangs on.

Should we raise an alarm or to wait till the audit?

Regards

S.Ramaswamy

[Rajagopalan Ranganathan]

Sir,

Rule 3 (5B) of CENVAT Credit Rules, 2004 stipulates that- "If the value of any,

(i) input, or

(ii) capital goods before being put to use, on which CENVAT credit has been taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods."

Section 17 (5) (h) of CGST Act, 2017 stipulates that " Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples."

In Section 17 (5) (h) of CGST Act, 2017 the words and phrases where any provision to write off fully or partially has been made in the books of account is absent. Therefore only when the inputs and/or capital goods are written off fully input tax credit availed on such inputs and/or capital goods is to be paid back. Therefore, in my opinion, where any provision to write off fully or partially has been made in the books of account the ITC availed need not be reversed.

Regarding litigation you can move your jurisdictional High Court or Supreme court only when a cause action arise. Unless an audit objection or show cause notice is issued by the Department, you cannot agitate the issue on presumptions and assumptions. If you file any writ petition in the High Court the same will be dismissed on the ground that you cannot claim any relief on presumptions and assumptions.

[Ganeshan Kalyani]

I fully agree with Sri Rajagopalan Sir's view.

[Nash Industries I Pvt Ltd]

thank you all.

By the term Alarm meant making provisions for the tax liability in the books when provision to write off of the inventory is made in books.

Regards

S.Ramaswamy

[Ganeshan Kalyani]

Again, on probability the accounts team will not pass entry in the books for provision for liability.

AI Summary

Input tax credit reversal: discrepancy between GST and Cenvat rules raises uncertainty on provisions to write off. A discrepancy arises because the Cenvat rule required reversal of credit where stock is written off or a provision to write off is recorded, whereas the CGST provision disallows input tax credit only when goods are actually written off. Consequently, making a provision to write off in the books does not, by plain language of the GST provision, trigger ITC reversal. The government could clarify or amend the law, with differing retrospective or prospective effects, and taxpayers face audit and litigation risk until the issue is resolved.