Reversal of credit on write-off under GST – Open issues

By Nirav S. Karia & Nivedita Agarwal

“Haste is of the devil” is a phrase that applies aptly to drafting of new legislations in haste which usually gives way to misinterpretation, lack of clarity, and challenges as to validity delaying the successful implementation of the statutes. The Goods and Services Tax legislation is the most recent example of this phenomenon where the implementation has been rushed giving way to ambiguity and leaving the legislation open to divergent interpretation.This article aims to highlight some of the issues being faced by the trade and industry with regard to reversal of input tax credit in case of goods written off and in case of creation of provision for write-off in the books of accounts.

            CGST Act provides for specific situations where input tax credit of the GST paid cannot be availed. One of the provisions where this restriction has been imposed is “write-off” of goods. The specific provision as contained in Section 17(5) is reproduced below for ease of reference:
“Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely :-……………….
(h) goods lost, stolen, destroyed, written-off or disposed by way of gifts or free samples”
 
On a plain reading of the above provisions, it seems that input tax credit is required to be reversed in cases when goods are written off. On the face of it, the provision looks simple and clear. However, as we delve deeper into the issue, we realise that the said provision is cloaked in obscurity and ambiguity. For one, the expression “write-off” has not been defined anywhere in the CGST Act or rules made thereunder. This raises many questions regarding the scope of the provision and includability of situations for reversal of credit.

• For instance, does partial write-off of goods in the books of account require reversal on the basis of the above clause?
• Will mere creation of provision in the books of accounts of an assessee for slow moving/obsolete goods also be covered under the phrase write-off and reversal be required?
• Will the write-off of value only for the purpose of compliance with accounting standards when the goods are physically available with the assessee also attract reversal?
• Will credit need to be reversed in case inputs procured in the excise regime (and Cenvat Credit transitioned in the GST regime) are now written-off or provision for write-off is being created?

The issue of reversal of credit in relation to write-off of inputs/capital goods has historically been a subject matter of dispute. The provisions for reversal of credit on account of write-off of inputs/capital goods was first introduced in the central excise regime by way of a circular in 2002. However, the circular was set aside in a plethora of judgements and the assessees were directed to not reverse the credit in the absence of specific provisions in this regard in the Central Excise Act and the rules thereunder. To overcome this legal handicap and put an end to the ongoing litigation, the Cenvat Credit Rules were amended to provide for reversal of credit in case of write-off. Initially, when the rule was introduced, the requirement of reversal was limited to inputs and capital goods written off fully in the books of accounts or in cases where provision to write-off fully was created in the books of accounts.

Though the above amendment provided reasonable degree of certainty and clarity on the said issue yet it did not completely put the issue at rest as it did not cover situations where the inputs/capital goods were partially written-off. The amendment was also silent in respect of the treatment in case of write-off of work in progress and finished goods. The Cenvat Credit Rules were later amended in 2011 to include the reversal of credit in case of partial write-off of inputs and capital goods.

The law in the erstwhile excise regime had finally settled after various amendments in the Cenvat Credit Rules from time to time and protracted litigation in this regard. However, the Government seems to have overlooked the past issues and amendments on the said issue and simply used the term write-off while drafting the GST legislation making it susceptible to various interpretations.

It has been seen in a number of instances that the internal auditors, statutory auditors and concurrent auditors are forcing the assessees to reverse the input tax credit in cases where the value of goods have been written off or provision for write-off has been created for the purpose of compliance of accounting standards or in terms of an internal policy adopted by the company even though the goods are still lying in the possession of the registered person. The assessees are in a quandary as to whether reversal of credit in such cases are required especially given the fact that the goods are in existence with the registered person and are capable of being used in making a taxable supply.

The provision in its current form is not correctly worded and ripe with potential for disputes and will eventually give way to another round of litigation.  This issue had been resolved to a large extent over the last one decade with successive amendments of the Cenvat Credit Rules, but it seems that we are back to square one with the introduction of GST.While the implementation has been directionally positive, there seems to be a long way to go both for the Government and the taxpayers in attaining a simplified GST regime. It is essential that necessary clarifications along with relevant amendments be carried out to facilitate the trade and align with the Government’s goal of ease of doing business.

[The authors are Joint Partner and Senior Associate respectively in Lakshmikumaran & Sridharan, Mumbai]