# Lost or Destroyed Stock: How to Review the GST Credit Implications ## Establish what actually happened to the goods Section 17(5)(h) addresses goods lost, stolen, destroyed, written off or disposed of as gifts or free samples. A stock review should identify the actual event and affected goods. A ledger entry called stock adjustment may represent theft, a counting error, a price change or a normal operational difference, and those facts should not be assumed identical. Begin with the date, location, quantity, condition and ownership of the goods. Confirm whether the business physically lost the stock, destroyed it, returned it, sold it as scrap or simply reduced its accounting value. A lower selling price does not automatically mean the goods ceased to exist or were written off physically. ## Build an incident and quantity record Keep the stock-count report, incident note, inspection evidence, internal approvals and other relevant records. Where applicable, connect insurance, police, transporter or disposal documents to the same event. The purpose is to establish facts, not to suggest every minor discrepancy requires the same formal document pack. Identify batch, item and location so the tax review can trace the goods to purchase or production records. A single value written off from inventory may be too broad to show which original tax credits are affected. Resolve duplicate or incorrect stock entries before treating a system variance as a physical loss. Illustratively, a pharmaceutical distributor finds 120 units of one batch expired and separately identifies 30 units missing from a count. The expiry and shortage should have distinct quantity and event records. Combining them as ₹75,000 of general damage would obscure both the cause and the supporting evidence. ## Trace the original credit rather than using selling value Link the affected goods to the relevant purchase invoices and credit history. Establish whether input credit was actually taken and the amount connected with the goods. Do not calculate a reversal by applying the sales tax rate to their expected retail price without checking the legal basis and original tax records. For manufactured goods, identify the relevant inputs and production records supporting the amount under review. A finished-goods write-off can require a more detailed analysis than a resale item with a direct purchase-invoice link. Record the method and uncertainties rather than creating an unsupported round-number credit adjustment. Check whether the original credit was already restricted or reversed for another reason. The loss review should not debit the same amount twice. An exception register connecting original claim, earlier adjustments and the incident makes duplication easier to prevent. ## Distinguish destruction from returns and scrap sales A supplier return, customer return and physical destruction are different events. Keep the original supply and adjustment documents linked to the stock. Where a credit note or fresh supply route is relevant, assess that process separately from the credit restriction arising when goods are ultimately destroyed. CBIC Circular 72/46/2018 discusses expired medicines, including alternatives for returning them and the credit implications when returned goods are destroyed. Use its relevant principles with the actual current provisions and facts rather than assuming every expired item follows one universal document path. If goods retain value and are sold as scrap, document the actual disposal supply and assess its tax treatment. The existence of a scrap invoice does not automatically answer the credit effect of a different quantity that was destroyed. Keep quantities reconciled so the business can distinguish what was sold, returned and lost. ## Assess insurance and accounting separately An insurance reimbursement does not by itself establish that the original credit remains available. The section 17 restriction concerns the relevant goods event, while insurance concerns compensation under a separate contract. Keep the claim settlement with the file, but do not use its payment as a substitute for a GST analysis. Similarly, a stock write-down and a write-off should be understood from the actual accounting and physical facts. A price provision for slow-moving goods still held for sale may not describe the same event as confirmed destruction. The accounts and warehouse teams should agree what happened before the tax preparer selects an adjustment. Where an incident affects several GST registrations or goods owned by others, identify whose stock and original credit are involved. Custody at one warehouse does not make all goods the warehouse operator's own inventory. The adjustment should follow the actual claimant and affected supply history. Give the loss event a reference that also appears in the inventory journal and insurance file where relevant. That connection helps staff avoid treating the later insurance settlement or physical disposal as a second independent loss. It also lets a reviewer trace the specific quantity affected without reopening every stock adjustment for the month. ## Record the decision and complete reporting Prepare a schedule with item, quantity, event date, original invoice or production linkage, credit previously taken, proposed adjustment and reason. Retain the current legal provision and any relevant clarification used. If the amount is unresolved, assign the missing fact or calculation to a responsible person instead of posting an unexplained reversal. Use the applicable return-reporting process and reconcile it to the books and credit ledger. Preserve the reporting period and acknowledgement so later staff can see whether the incident was only recorded in inventory or also addressed in GST. A stock journal alone does not prove the required tax adjustment was completed. Close the file with a quantity reconciliation from opening stock through loss, returns, disposal and closing balance. This gives the business an understandable record of the incident and supports a credit decision based on the actual goods affected rather than a broad inventory expense label. ## Sources and references - [CBIC: current CGST section 17, apportionment and blocked credits](https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter5/section17_v1.00.html) - [CBIC: Central Goods and Services Tax Act, consolidated through August 2021](https://cbic-gst.gov.in/pdf/CGST-Act-Updated-31082021.pdf) - [CBIC Circular 72/46/2018-GST: return of expired medicines](https://cbic-gst.gov.in/pdf/Circular-72-46-EXPIRED-DRUGS.pdf) - [CBIC Circular 170/02/2022-GST: reporting ITC and reversals](https://www.gstcouncil.gov.in/sites/default/files/2024-06/cir-170-02-2022-cgst.pdf) - [CBIC CGST Rules compilation through September 2021](https://cbic-gst.gov.in/pdf/24092021-CGST-Rules-2017-Part-A-Rules.pdf)