QUESTION

Mr. A is engaged in the business of resale of Sarees, Dress Materials etc. During the year F. Y. 2019-20, a fire took place and the Goods Worth of Rs. 2,50,000 was completely destroyed and worth of Rs. 80,00,000 damaged heavily in this accident. There is an insurance coverage of the goods. He has reversed the ITC of the completely destroyed goods of Rs. 2,50,000. The damaged goods is lying with him. He has been informed by the company that he will have to sell it in the market as and when the company will instruct. Market value of the damaged goods would be around Rs. 5,00,000 (Purchase value Rs. 80,00,000). He has lodged the claim excluding GST before the Insurance Company which is not yet finalized .
Query: (1) What will be the GST impact of the heavily damaged goods worth of Rs. 80,00,000? (2) If he receives total insurance claim of Rs. 70,00,000, does it make any effect on GST? (3) When should the effect on the portal be given ?

ANSWER

FACTS OF THE CASE:

In an accidental fire, goods worth 2,50,000 were completely destroyed. Other goods worth 80,00,000 were partly destroyed and these are now valued at 5,00,000.

LAW APPLICABLE:

1. Clause (h) of section 17(5) CGST is laid as under

" (h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples "

2. Section 2(52) CGST defines goods as follows

" 'goods' means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply "

INTERPRETATION:

Goods worth 2,50,000 that are completely destroyed by fire will not be used in course or furtherance of business and therefore ITC thereon is blocked u/s 17(5)(h) CGST. This ITC has been rightly reversed by the company.
Goods worth 80,00,000 are damaged and will be subsequently sold for 5,00,000. Therefore these goods will ultimately be supplied under a taxable transaction the consideration of which will be 5,00,000. GST on output value of 5,00,000 will be charged as and when the damaged goods are supplied.
When 70,00,000 compensation is received from the insurance, this money can not be said to be a consideration in lieu of a supply. Rather it is received in lieu of the annual premium which is paid by the person. Therefore this is a transaction in money. Money has been excluded from the definition of goods under section 2(56) CGST therefore this transaction is out of the ambit of GST law.

CONCLUSION:

So to answer your questions;

Question 1: What will be the GST impact of the heavily damaged goods worth of Rs. 80,00,000?
Answer 1: GST will be paid on outward supply of damaged goods when these are sold for 5,00,000.

Question 2: If we receive total insurance claim of Rs. 70,00,000, does it make any effect on GST?
Answer 2: Since this is a transaction in money and money is excluded from the definition of "goods" therefore no GST will be applicable on this transaction.

Question 3: When should we give the effect on the portal?
Answer 3: Effect of reversal of ITC on 2,50,000 should be given immediately. Effect of GST on sale of damaged goods will be given as and when the goods are sold. There is no effect of money received from the insurance company. (Reply dt. 25/05/2022)