Implication of inventory graded inventory write off vis-a-vis Section 17(5)(h)

[Raam Srinivasan Swaminathan Kalpathi]

A retail store has a policy of write down of the value of its old inventory at the end of each reporting period. At the end of the first year - inventory carried over is reduced by 30%, second year 50% and by the end of the third year 100% of the inventory is written off. My query is - when will the provisions of Sec.17(5)(h) kick in? Do we have to indulge in proportionate reversal of availed ITC or should the ITC availed be reversed only when the inventory is fully written down to zero?

Secondly, suppose the retail store is able to sell some of the inventory written off, what would be the treatment of the ITC already expunged?

Thanks

[YAGAY andSUN]

Section 17(5)(h) of the CGST Act blocks ITC on goods that are lost, stolen, destroyed, written off, or given as gifts/free samples. The key issue is whether accounting write-downs of inventory trigger ITC reversal.

A clear distinction exists between write-down and write-off. A write-down is only an accounting adjustment reducing the carrying value of inventory due to decline in net realizable value. The goods physically exist and remain available for sale. A write-off, however, involves actual removal of goods from books due to destruction, obsolescence, loss, or disposal.

1. When does Section 17(5)(h) apply?

Mere partial or progressive write-downs (e.g., 30% or 50%) do not amount to write-off. Since goods continue to exist and are capable of being sold, no ITC reversal is triggered at this stage.

ITC reversal arises only when:

• goods are actually destroyed, discarded, lost, or expired, or
• inventory is fully written off and ceases to exist for taxable supply.

Thus, the provision is trigger-based, not valuation-based.

2. Proportionate ITC reversal

There is no statutory mechanism for proportionate ITC reversal based solely on accounting impairment. Unless goods are physically removed or identifiable quantities are written off, ITC reversal is not required in parts.

3. Subsequent sale of written-off goods

If goods earlier written off (and ITC reversed) are later recovered and sold:

• GST is payable on the outward supply at transaction value.

However, the law is silent on re-credit of ITC earlier reversed. Two views arise:

• Conservative view: ITC once reversed is permanently lost.
• Equitable view: since goods re-enter taxable supply, re-credit should be allowed to avoid double taxation, though not expressly provided in law.

4. Core principle

GST aims to ensure tax neutrality and avoid cascading. Therefore, ITC should be denied only where goods permanently exit the taxable supply chain, not where they merely suffer accounting impairment.

5. Practical takeaway

• Inventory write-downs alone do not trigger Section 17(5)(h).
• ITC reversal is required only on actual write-off/destruction/disposal.
• Maintain strong documentation for stock existence and valuation changes.
• Avoid premature classification of goods as "written off".

Conclusion: Section 17(5)(h) applies only to actual write-off or disposal of goods, not to mere accounting reductions in inventory value.

[Sadanand Bulbule]

Well explained.

[Raam Srinivasan Swaminathan Kalpathi]

A profuse thank you sir. Your lucid exposition on the provisions of blocked credit is crystal clear.

[Ryan Vaz]

A mere reduction in inventory carrying value (provision/write-down for obsolescence) does not automatically trigger Section 17(5)(h) if the goods continue to physically exist and remain intended for taxable sale.

In your fact pattern, the stronger and more defensible position is:

• No proportionate ITC reversal is required merely because accounting value is reduced by 30% or 50%.
• ITC reversal under Section 17(5)(h) should arise when the inventory is actually written off/discarded/destroyed, i.e., when management concludes the goods are no longer saleable/useable and removes them from usable inventory (100% write-off situation).

If such goods are later sold after full write-off, GST is payable on the outward supply. There is presently no explicit statutory mechanism allowing re-credit/reclaim of ITC once reversed under Section 17(5)(h), though a technical argument exists in favour of restoration.

[Amit Agrawal]

I agree with YAGAY andSUN at its post at Sr. No. 1.

In this context, Rule 3 (5B) of Cenvat Credit Rules, 2004 is worth nothing which has dealt with 'Value of Goods written off' (either fully or partially or where any provision to write off fully or partially has been made in the books of account) was the 'prescribed situation' warranting reversal of Cenvat Credit and there, re-credit option was given if such goods gets subsequently used in the manufacture of final products or the provision of output services.

However, Sec.17(5)(h) ONLY deals with 'Goods Written Off' (i.e. in addition to goods lost, stolen, destroyed, or disposed of by way of gift or free samples). The words 'written off' also needs to be understood in the context of other words occurring prior to that word as well as subsequent words of Section Sec.17(5)(h).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Sadanand Bulbule]

Sri. Amit ji

So happy to see you after long time.

[Amit Agrawal]

Thank you, Shri Sadanand Bulbule Ji!

[Shilpi Jain]

You can go through this article as well on this topic. https://www.taxtmi.com/article/detailed?id=9286

Mere write off of value in books should not attract reversals.

AI Summary

Inventory write-down versus write-off under GST: ITC reversal arises only when goods actually exit the taxable supply chain. Section 17(5)(h) blocks input tax credit on goods that are lost, stolen, destroyed, written off, or given away as gifts or free samples, but a mere inventory write-down does not itself trigger reversal. A reduction in carrying value while goods continue to exist and remain saleable is only an accounting adjustment. ITC reversal arises when goods are actually written off, destroyed, lost, expired, or otherwise cease to be available for taxable supply. If written-off goods are later sold, GST is payable on the outward supply, though the law does not expressly provide for restoration of the reversed credit.