Contradictory Rulings Put Cos in a Fix over Tax Credit for Lost Goods

Contradictory rulings by the Madras High Court and an Authority for Advance Ruling (AAR) have created confusion over input tax credits in cases where the final product could not be sold in the marked due to loss or damage amid the pandemic, experts said.

The Madras High Court in a recent case ruled that input tax credit availed by a company or a manufacture need not be reversed in case of a loss incurred during the manufacturing process amid Covid-19.

The Gujarat AAR, in another ruling, however, said the tax credit on inputs (raw materials) used in manufacturing needs to be reversed even if the goods are destroyed or damaged.

Input tax credit is a mechanism where by part of the GST paid by companies or manufacturers can be set off against future tax liabilities. In cases where the goods are not sold and tax not collected but the credit is already claimed, the rules mandate that the tax credit has to be reversed.

The issue could impact cash flows of several pharmaceuticals, FMCG and other manufacturing companies as many firms have seen huge losses due to Covid pandemic, tax experts said. In most cases, goods were destroyed in transit or storage.

While ordering tax credit reversal in the case of a company that manufactures and distributes cakes and pastries, the AAR said similar situations and scenarios are also covered by government circular for pharma companies and how tax credit should be accounted for in case of expired drugs or medicines. The Madras High Court, in a case involving ITC, held that tax credit should not be reversed if “losses occur due to external factors or compulsions”.

Tax experts said this should cover losses incurred by companies due to the pandemic to an extent.

The high court allowed eligibility of ITC on normal losses which occur in the manufacturing process, said Harpreet Singh, partner, indirect tax, at KPMG in India.

“For a bakery involved in manufacture of cakes, expired cakes and pastries can also be viewed as part of normal manufacturing loss in the course of business and, hence, some may argue that input credit should be available,” he said.

The main issue, according to tax experts, is, what happens to the tax credit in cases where the goods are destroyed, lost or damaged? The way GST works is that tax is first paid on the raw materials, input services and then part of that can be claimed as credit when those are sold. S-ET

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