Companies will have to reverse tax credit availed on goods destroyed due to Covid-19 lockdown


Companies will have to reverse tax credit availed on goods destroyed due to Covid-19 lockdown

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Income Tax
Companies will have to reverse tax credit availed on goods destroyed due to Covid-19 lockdown

 Many FMCG and pharma companies that had paid Goods and Services Tax (GST) on raw materials and services used to manufacture perishable goods are staring at a situation where they will have to reverse input tax credit (ITC) availed, as these goods could never be sold before their expiry date due to the nationwide lockdown.

As per the GST framework, companies have to first pay GST on raw materials or services used to make a product. Companies can avail the credit once the final product is sold to distributor or wholesaler. The wholesaler or the distributor could get the GST credit when they sell the product to the retailer.

The problem now is, in many cases, the retailers are coming back and saying they are unable to sell the products as their shelf life has passed. This will lead to a situation where companies, wholesalers and in some cases even retailers will have to reverse the input tax credit availed.

“An additional GST cost on these perishable goods further adds financial trouble for these businesses - which already have a significant loss linked to spoilage of limited shelf life products. The industry has represented aggressively on the issue and is expecting relief from the government on this issue,” said Abhishek Jain, Tax Partner, EY.

Tax experts say that the situation gets even more complicated, as some raw materials don’t fall under the perishable bracket and then there is the issue of input services, so this would mean companies will have to proportionately calculate and reverse the input tax credit.

Tax experts say that there could be two ways to deal with the situation.
 

Either the goods are returned by the retailer back to the wholesaler and then to the manufacturer and credit is reversed (subject to timelines provided under the law), or a post sale price discount is given to compensate for losses.
"But in such a situation, there is a dispute as to whether GST already paid can be adjusted by the manufacturer or distributor. In cases where the goods are not sold or destroyed, there is no option but to reverse the input credit. This is a major issue in FMCG and pharma sectors and more relevant in a Covid-19 scenario," said Pratik Jain, Partner and National Leader - Indirect Tax at PwC India.

Many companies have also approached the government and sought a tweaking in the GST law temporarily due to Covid-19 pandemic.

Companies want the revenue department to allow GST to be charged on actual cash receipts as against when invoices are raised.

This would mean that companies do end up paying GST on bad debts or in cases where goods are not sold to the final customer.

Insiders point out that many tax officials have objected to this proposal as they think this could result in a revenue leakage for the government.

The worry is in many cases vendor or supplier could claim GST credit but the company may never pay the corresponding tax.
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