When inventory goes missing from a godown, gets stolen in transit, or is ruined by a factory fire, businesses immediately write off the loss in their accounts. Under GST, physical loss also triggers an immediate statutory adjustment. Because the goods will never form part of an outward taxable supply, tax authorities do not permit you to retain the tax credit paid on their inward purchase.
Understanding how the law treats these losses saves you from unexpected audit demands, interest liability, and penalties during department reconciliations. You can read the complete statutory catalogue of blocked credits in our guide on blocked credit under GST Section 17(5) list with examples.
Statutory bar under Section 17(5)(h)
Credit admissibility begins with Section 16(1), which allows registered persons to take credit on goods used or intended to be used in the course or furtherance of business. However, Section 17(5) starts with an overriding clause that overrides Section 16(1).
Under Section 17(5)(h) of the CGST Act, input tax credit is blocked on:
“goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”
This statutory bar covers multiple real-world operational scenarios:
- Goods lost: Items missing due to transit loss, unidentifiable pilferage, or handling shortages.
- Goods stolen: Merchandise taken during theft, burglary, or highway hijacking where an FIR is lodged.
- Goods destroyed: Stock completely ruined by fire, water inundation, structural collapse, or chemical decay.
- Goods written off: Obsolete stock, expired items, or damaged raw materials whose value is written off in the financial books of account.
- Disposed of by gift or free samples: In CBIC Circular No. 92/11/2019-GST (para 2), the Board confirmed that where samples or gifts are supplied without consideration, credit is blocked on inputs, input services, and capital goods to the extent used for such items.
Common mistake: Treating regular stock write-offs as normal business overheads without reversing ITC. If you debit stock write-offs to your profit and loss statement, tax auditors match those ledger amounts against GSTR-3B Table 4(B)(1) reversals during scrutiny.
How insurance claims affect ITC on destroyed goods
A frequent point of confusion among taxpayers is whether an insurance settlement relieves them from reversing ITC. When insured goods burn down in a factory or warehouse, the insurer reimburses the market value or cost of replacement. Many accountants assume that because tax was included in the replacement value calculation, the ITC can stay intact.
This assumption is legally incorrect. An insurance payout is a financial settlement for indemnity. It is not consideration for an outward supply of goods. Because the destroyed inventory is never supplied in the course of commerce, the condition set out in Section 17(5)(h) applies in full. The taxpayer must reverse the ITC availed on the procurement of those goods, regardless of whether the insurer approves 100 percent, 50 percent, or none of the insurance claim.
In addition, when presenting the statement of loss to an insurance surveyor, companies must clarify whether the claim amount is based on basic purchase cost or gross cost. If you claim the net purchase cost from the insurer, you reverse the ITC in your GST returns. If the insurance surveyor insists on deducting ITC from the claim, that deduction reflects commercial policy terms, but it does not exempt you from your statutory tax obligation under Section 17(5)(h).
Reporting the reversal in Form GSTR-3B
The reporting procedure for ITC reversals depends on the instructions outlined in the official portal guides and circulars.
According to CBIC Circular No. 170/02/2022-GST and the GSTN GSTR-3B user manual:
- All eligible and ineligible ITC appearing in Form GSTR-2B is first populated in Table 4(A).
- Permanent, non-reclaimable reversals under Section 17(5) and Rules 38, 42, and 43 must be reported in Table 4(B)(1) of Form GSTR-3B.
- Do not enter this reversal in Table 4(B)(2), which is reserved strictly for temporary reversals that can be reclaimed later, such as non-payment to vendors within 180 days under Rule 37.
If you identify goods lost or destroyed in a subsequent financial year after filing the annual return, or if you settle an audit inspection, you must reverse the credit using Form GST DRC-03 by selecting the reason code for Section 17(5) ineligible credit.
Worked example: fire loss, accounting entries, and reversal
Consider a registered wholesale dealer, Apex Electricals, based in Maharashtra. In November 2026, an accidental fire in their godown destroys electrical switches and wires purchased earlier in the month.
- Taxable value of destroyed goods: ₹2,00,000
- GST rate: 18% (CGST 9% of ₹18,000 + SGST 9% of ₹18,000 = ₹36,000)
- Total invoice value: ₹2,36,000
- Vendor invoice correctly reported in GSTR-1 and visible in Apex Electricals' GSTR-2B.
| GSTR-3B section | CGST (₹) | SGST (₹) | Net tax impact (₹) |
|---|---|---|---|
| Table 4(A)(5) All other ITC (auto-populated from 2B) | 18,000 | 18,000 | +36,000 |
| Table 4(B)(1) Reversal as per Section 17(5) | 18,000 | 18,000 | -36,000 |
| Table 4(C) Net ITC available | 0 | 0 | 0 |
The mathematical adjustment works out to: Net ITC = Table 4(A)(5) [₹36,000] minus Table 4(B)(1) [₹36,000] = ₹0.
Book entries for loss and ITC reversal
To keep the books of account aligned with the GST return, the accountant passes the following journal entries:
1. At the time of purchase:
Purchase Account Dr. ₹2,00,000
Input CGST Account Dr. ₹18,000
Input SGST Account Dr. ₹18,000
To Vendor Account Cr. ₹2,36,000
2. Upon destruction and reversal of ITC under Section 17(5)(h):
Loss of Stock by Fire Account Dr. ₹2,36,000
To Trading / Purchase Account Cr. ₹2,00,000
To Input CGST Reversal Account Cr. ₹18,000
To Input SGST Reversal Account Cr. ₹18,000
3. Upon receiving insurance settlement of ₹1,90,000:
Bank Account Dr. ₹1,90,000
Profit and Loss Account (Net Loss) Dr. ₹46,000
To Loss of Stock by Fire Account Cr. ₹2,36,000
Accounting principle: Because GST is a statutory cost when credit is blocked, the reversed ITC of ₹36,000 forms part of the total extraordinary loss debited to the profit and loss statement.
Frequently asked questions
Can you claim ITC if lost goods are fully covered by an insurance payout?
No. Section 17(5)(h) bars input tax credit on goods lost, stolen, or destroyed regardless of whether an insurance company settles your claim. An insurance settlement compensates commercial value, but the statutory condition that goods must be used in making taxable supplies remains unfulfilled.
Where do you report reversal of ITC for destroyed goods in Form GSTR-3B?
Report the reversal under Table 4(B)(1) as an ineligible reversal under Section 17(5). Circular No. 170/02/2022-GST specifies that absolute, non-reclaimable reversals belong in Table 4(B)(1), rather than temporary reversals in Table 4(B)(2).
What happens if goods were destroyed after you already claimed ITC in an earlier month?
You must reverse the exact ITC attributable to the destroyed goods in Table 4(B)(1) of Form GSTR-3B for the tax period in which the loss occurred, or pay the amount through Form GST DRC-03 along with applicable interest if delayed beyond the due date.
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Last checked: 25 October 2026. Sources: Section 17, CGST Act, CBIC Circular No. 170/02/2022-GST, CBIC Circular No. 92/11/2019-GST, GSTN GSTR-3B Manual.