Start with the stock event and the credit actually at risk
Section 17(5)(h) of the CGST Act, 2017 blocks ITC on goods lost, stolen, destroyed, written off or disposed of as gifts or free samples. This guide deals with identifiable purchased trading goods and invoice credit, including goods for which credit was taken before the incident. Start by proving which goods fall within the restriction; do not calculate the blocked amount by applying a sales tax rate to the book write-off or insurance value.
Read the applicable text: India Code: CGST Act, section 17(5)(h) CGST Rules, rules 56 and 88B CBIC Circular 170/02/2022-GST: Table 4 reporting.
Reconcile each event to the stock and purchase records
Rule 56(2) requires a registered person other than one paying tax under section 10 to maintain stock accounts including losses, theft, destruction and write-offs, as well as raw materials, finished goods, scrap and wastage. Identify the SKU, lot, actual quantity affected, incident or approval date, purchase document and tax heads. If a purchase lot supplied both destroyed and surviving units, establish which units were affected and trace an evidenced share of the invoice credit. When costs or credits differ across lots, use the actual source records rather than a single unsupported rate.
Classify the stock treatment before reversing
Differentiate actual loss or destruction, a genuine write-off, temporary quarantine, a valuation adjustment and surviving salvage. An accounting entry for obsolescence or a stock count variance is a reason to investigate the facts. Do not treat every valuation adjustment as a statutory write-off or disregard a proved physical loss because the accounting entry is delayed. This article does not propose an attribution rule for normal process loss or for input services embedded in manufactured finished goods.
Report permanent ineligibility and avoid a second reversal
CBIC Circular 170/02/2022-GST, paragraph 4.3(B), maps ineligible credit under section 17(5) to GSTR-3B Table 4(B)(1). Link the incident to the original claim or relevant auto-populated amount, previously reversed credit, and the current adjustment. Do not reverse the same credit twice or show a permanent block as a reclaimable temporary reversal. Where a prior period or disputed ledger utilisation is involved, document the facts and review the supported reporting and correction separately. Where the issue is wrongly availed credit, test both wrong availment and utilisation under section 50(3) and apply rule 88B to any interest calculation.
Keep the sale and insurance records separate
A taxable sale of surviving damaged stock or salvage, where applicable, has its own output-tax analysis. It does not automatically restore credit attributable to goods proved destroyed. Keep invoice, disposal and sale records linked but distinct. An insurer's settlement can corroborate an incident or a quantum; it does not measure the input tax previously claimed.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: One traceable batch
A distributor buys 100 identical units and claims ₹18,000 GST on them. Forty units are destroyed. Assuming equal per-unit input tax and no earlier reversal, blocked credit attributable to the 40 is ₹7,200; ₹10,800 relates to the surviving 60.
Illustrative example 2: Two invoice lots at different credit amounts
Ten destroyed units trace to an invoice with ₹120 of credit per unit, and fifteen to another with ₹180 per unit. Assume the credit was eligible before destruction, was actually taken and was not already reversed. The amount attributable is ₹1,200 plus ₹2,700, totalling ₹3,900.
Illustrative example 3: No earlier net credit retained
A destroyed batch carried ₹24,000 GST. Assume it was never credited and is not in the current auto-populated amount. Previously retained credit for the batch is nil; there is no earlier ₹24,000 claim to undo. Keep the document blocked from future claim.
Illustrative example 4: Separate tax heads
An intra-State purchase of 200 equal-credit units has ₹12,000 CGST and ₹12,000 SGST. Fifty units were stolen. The attributable credit is ₹3,000 CGST and ₹3,000 SGST, or ₹6,000 in total.
Illustrative example 5: Previously reversed amount
Evidence shows ₹20,000 credit is permanently ineligible. Of this, ₹8,000 was already reversed and remains reversed. The remaining amount to remove is ₹12,000, with the earlier amount documented so it cannot be reclaimed in error.
Illustrative example 6: Book loss is not the GST measure
A company's stock loss recorded in the ledger is ₹1,40,000 and the insurance claim is ₹1,10,000. Traceable purchase GST previously taken for the affected goods is ₹16,500. The ₹30,000 gap between book loss and claim does not determine the ₹16,500 credit amount.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the physical event | Incident, loss or destruction record |
| 2 | Confirm the classification | Warehouse and finance review |
| 3 | Freeze affected quantities by lot | Stock register and counts |
| 4 | Trace goods to purchase documents | Invoice and receipt matching |
| 5 | Calculate credit by tax head | Lot-level attribution working |
| 6 | Verify original credit taken | Filed returns and credit ledger |
| 7 | Deduct prior reversals from the remaining amount | Prior period and reversal records |
| 8 | Confirm permanent reporting | Table 4(B)(1) review |
| 9 | Separate salvage and insurance | Disposal, output and claim records |
| 10 | Reconcile final quantities and credit | Approved stock and tax roll-forward |
Sixteen practitioner FAQs
1. Does theft of trading stock fall within the restriction?
Yes. Section 17(5)(h) expressly includes stolen goods.
2. Can I estimate blocked ITC as the sales rate times insurance value?
No. Trace the purchase-side input tax attributable to the goods.
3. Does a stock count difference prove destruction?
No. Investigate transfers, posting errors, shortages and possible loss before classifying it.
4. Does a valuation reduction automatically prove a write-off?
Review the actual accounting and stock treatment rather than inferring the legal result from the description.
5. What if only part of an invoice lot was destroyed?
Use the quantity and actual invoice credit attributable to the affected units.
6. Do two batches with different credit amounts need separate workings?
Yes. Keep the batch attribution and tax heads visible.
7. Should a never-claimed invoice be reversed again?
Do not reverse a historical claim that was never taken. Check current auto-population and block any inadmissible amount.
8. Where is permanent blocked ITC reported in GSTR-3B?
CBIC's Table 4 guidance maps section 17(5) ineligibility to 4(B)(1).
9. Can the amount be tracked as reclaimable?
A permanent statutory block should not be recorded as an amount available to reclaim.
10. How do we handle credit already reversed for the same units?
Trace and preserve it, then calculate only the amount still remaining to be removed.
11. Does a damage report alone determine the value?
It supports physical facts; the purchase invoices and original credit supply the amount.
12. Does insurance recovery restore credit on destroyed stock?
No automatic restoration follows from an insurance recovery.
13. What if usable damaged units are sold?
Analyse the actual stock status and any output liability separately from items proved lost or destroyed.
14. What if stock is merely quarantined pending inspection?
Record and monitor the quarantine; establish the actual statutory event before deciding permanent ineligibility.
15. Can this invoice method be copied for all manufacturing wastage?
No. Normal process loss and embedded input credit can raise separate questions.
16. What if an earlier claim was used before correction?
Review the applicable correction and interest provisions using actual ledger evidence and dates.
Official sources
India Code: CGST Act, section 17(5)(h) CGST Rules, rules 56 and 88B CBIC Circular 170/02/2022-GST: Table 4 reporting