Input tax credit must be reversed when finished goods are destroyed: Expert

Q. We are manufacturers of chemicals. The goods produced in a particular batch are not of correct quality. We cannot sell it or use it. We want to destroy them for quality reasons. Does the GST law allow it? Do we have to inform or take permission from the jurisdictional authorities?

Under the GST law, you do not need to inform or take permission from any authorities for destroying the finished goods. However, as per Section 17(5) (h) of the CGST Act, 2017, input tax credit shall not be available in respect of goods destroyed. So, you have to surrender the credit taken in respect of inputs and input services used in the manufacture of goods destroyed.  

Q. We provide cleaning services to Eastern Railway. Can we claim exemption from GST on the basis of S. No. 3 and 3A of the notification 12/2017-Central Tax (Rate) dated June 28, 2017, as amended?

The entries 3 and 3A you have referred to apply respectively to pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central government, State government or Union Territory or local authority or a governmental authority or a government entity, by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution, or in relation to any function entrusted to a Municipality under Article 243W of the Constitution and  composite supply of goods and services, in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central government, State government or Union territory or local authority or a governmental authority or a government entity by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution. The Railways is a State-owned commercial organisation. The service provided is not by way of any activity in relation to any function entrusted to a Panchayat or Municipality. The Authority for Advance Ruling, Delhi has, in a similar matter, vide its Advance Ruling No. 06/DAAR/2018 dated April 23, 2018, ruled that exemption is not available in such cases.

Q. We have prematurely terminated the service of an employee and paid three months notice pay. Is there any GST liability on that amount?

No. Such amounts paid by the employer to the employee for premature termination of a contract of employment are treated as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, the amounts so paid would not be chargeable to GST. However, any amount you pay to him for not joining a competing business would be liable to GST, being consideration paid for providing the service of forbearance to act.