ITC on Process Loss | Is the Issue Far from Settled?

While there are numerous grey areas in the availability of credit under GST law, one common area of concern has been credit availability on process loss. Generally, there are certain raw materials which are damaged or become unusable in the process of manufacture, typically known as “process loss”. Some typical examples of such process loss are end cuttings in the textile industry, side cuttings of packaging materials and floor sweepings in food industry.

In this backdrop, the question to ponder is whether credit is available on such raw materials which are damaged or destroyed or which become unusable in the production process and are thereafter either disposed of or destroyed by the taxpayer without any corresponding proceeds.

The entry point for availment of credit under GST law is the use of goods or services in the course or furtherance of business¹ and thereafter, all supplies are also required to pass through the litmus test of not falling under any of the restricted categories².

It is worth noting that “business” under GST law is of wide import including within its ambit any activity, whether or not the same is for a pecuniary benefit. As far as the nexus with business is concerned, it is possible to take a stand that since the raw materials are put to use in manufacture, the same are used in the course or furtherance of the business.

The restricted category which is causing a dilemma in the minds of the tax payers is the restriction vis-à-vis goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples³.

The question is whether the raw materials which are damaged or destroyed or become unusable during the production process and are thereafter disposed of without any corresponding consideration are “goods destroyed or lost”. If the answer is in the affirmative, then the credit is barred under the above restriction.

At first blush, it appears that the legislature intended to deny credit where goods were destroyed, stolen or disposed of irrespective of the manner in which such goods were destroyed, stolen or lost or disposed of. Moreover, it is interesting to note that the barring provision⁴ starts with a non-obstante clause requiring reversal irrespective of the manner in which such goods were lost, stolen or destroyed.

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