ITC Credit for Raw materials sold as Scrap, Goods and Services Tax - GST

[JOHN SHANNEL]

Hello friends,

We had purchased raw materials for production of Finished goods. But due to change of sale plan i could not use the raw materials and sold the same as scrap. The scrap realization is 25% of the raw material value. Can i take ITC credit for these raw materials items under my normal business transaction? Please advice.

Posts / Replies

[Sadanand Bulbule]

Dear querist

Yes, you can take proportionate ITC on the value of goods sold as scrap.

[Amit Agrawal]

If goods are NOT 'lost, stolen, destroyed, written off or disposed of by way of gift or free samples', then, there is no bar in taking ITC. And there is no legal concept of 'proportionate ITC on the value of goods sold as scrap' under GST law for given situation. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Amit Agrawal]

Moreover, there is no bar in availing ITC u/s 16(1) in given situation as subject goods were intended to be used in the course or furtherance of tax-payer's business even though same was not actually so used in the way originally intended (i.e. manufacturing). 

In this regard, attention is invited to discussion we had under Issue-ID: 118820 bearing subject-line as 'SEC 17(5)(h)', wherein I explained why the words "intended to be used" cannot mean "used" while interpreting Section 16(1).

Furthermore, Section 18(6) applied only to 'capital goods or plant and machinery' and not for inputs / raw material & Section 18(4) is applicable only when tax-payer opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt. Querist's given situation does not fall under either Section 18(4) or 18(6). 

In old / excise regime, there was specific Rule 3(5) of Cenvat Credit Rules, 2004 which required manufacturer to pay equal taxes (i.e. equal to credit taken) in situation explained by the querist. There is no such provision under GST. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Shilpi Jain]

Full credit can be availed.

[KASTURI SETHI]

Here 'scrap' has not arisen out of manufacturing process. Hence such scrap is not finished product. 

Such supply of 'scrap' (raw material)  falls in the definition of business defined under Section 2 (17) and also covered in the widest  scope /expression, "in the course of business or furtherance of business".

Hence proportionate  ITC is allowed.

In view of the above reasoning, I fully support the views of Sh.Sadanand Bulbule, Sir Ji.

[KASTURI SETHI]

This is in  continuation of my above post.

The concept of 'input removal as such' in GST regime has been dispensed away with because  it  becomes  redundant, especially, keeping in view of the larger scope of the definition of , 'business' and phrase/expression, 'in the course of business or furtherance of business'.

[Amit Agrawal]

As said in my earlier post at Sr. No. 2 above,  there is no legal concept of 'proportionate ITC on the value of goods sold as scrap' under GST law for given situation.

I have further expanded my views in my post at Sr. No. 3 above to explain why there is no legal basis under present GST law to allow only proportionate ITC in given situation. 

And no-one could point out applicable legal provisions in GST law/s & rules made there-under to explain 'legal need' to take proportionate ITC in given situation

Similar view about 'proportionate ITC' were raised during discussion under Issue-ID: 118018, bearing subject-line: GST APPLICABILTIY ON VALUE REDUCTION (ON PREV SUPPLY), wherein your attention is invited to Posts From Sr. No. 6 onwards & my views thereon (i.e. If one is selling / supplying at a loss, there is no legal requirement per se to reverse ITC against the loss). Even then, no-one could point out gst provisions to explain requirement of proportionate reversal of ITC against goods sold at loss.

I stand by my views given in July, 2022 on this TMI forum and I stand with my views even now in situation under discussion here. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Pradeep Reddy]

No bar in availing ITC, full ITC can be availed. 

[KALLESHAMURTHY MURTHY]

Dear Sirs,

The raw materials purchased were not utilised for converting to finished goods or used in trading but let the materials be scrapped. Hence it has lost its originality. So, the materials purchased did not generate output tax notionally. But the tax on the sale of scrap is payable. There would be an enrichment of ITC if ITC is availed on the entire purchase value. Therefore the eligibility for ITC falls under section 17 (1). Hence, as opined by Sri Sadanand Bulbule Sir, and Sri Kasturi Sethi Ji, ITC can be availed proportionately..

 

[KASTURI SETHI]

Sh.Murthy Ji,

I am all praise for your  hard work and expression on the issue. At the same time I like to say that  we also learn a lot from  dissent. Any disagreement on any issue  increases our knowledge.  Whenever you disagree with me on any issue, I make more efforts to reach the depth.  Thanks a lot.

[Amit Agrawal]

Dear Shri KALLESHAMURTHY MURTHY Ji,

Thanks for taking efforts to explain 'proportionate reversal of ITC' by quoting some legal provisions under GST and trying to provide some cogent 'legal reasoning' for the view taken by you.

Such efforts indeed help us to understand your legal reasoning better for taking a particular view, give our views thereon and make this 'discussion' lively, comprehensive & really meaningful for other contributors, visitors and querist/s. 

Unfortunately but with due respect for your views, I beg to differ with your legal reasoning for following reasons:

A. Everyone agrees that GST is indeed payable by the taxpayer while selling subject goods at its 'scrap value'. In other words, said goods were sold in the course or furtherance of business of the taxpayer and thereby, falls within the term 'supply' u/s 7 of the CGST Act, 2017.

B. Consequently, it becomes clear that subject goods were used by the taxpayer in the course or furtherance of his business and thereby, he becomes eligible for credit of input tax charged on subject supply of goods or services or both to him u/s 16(1) of the CGST Act, 2017.

C. As subject goods were used only for 'business' (as defined u/s 2(17) of the CGST Act, 2017) of the taxpayer & there was no other purpose, Section 17(1) does not apply. 

C1. Assuming that Section 17(1) indeed applies to given situation (though I disagree with such a proposition), even then, tax-payer needs to reverse only 5% of the ITC and not "proportionately" (i.e. 75%) in given situation (Reference: Rule 42(1)(j) of the CGST Rules, 2017). 

D. When ITC is availed as per provisions of law and when same is NOT required to reverse (even "proportionately") as per provisions of law (as no-one could point out such provisions exists under GST law requiring "proportionate" ITC reversal in given situation), then, there is no legal question of 'enrichment of ITC' to the taxpayer. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.