Blocked Credit in FMCG: Expired Stock, Recalls and Transit Losses

Blocked Credit in FMCG explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Section 17(5)(h) is short, but for a sector that writes off inventory as a matter of routine it is the most expensive provision in the Act. What happens to the goods after they go wrong decides whether the credit survives — and rework, relabelling and destruction produce three different answers.

Section 17(5)(h) blocks ITC on "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples." For FMCG this reaches expired stock, fire and flood losses, abnormal transit damage and destroyed recall batches — but not goods that are reworked and resold, or relabelled and resold, because those re-enter the taxable supply chain. Insurance recovery does not reinstate the credit: the reversal must be made "irrespective of insurance recovery."

Expired stock, batch by batch

The Guide's illustration. A biscuit manufacturer holds "₹2 crore of biscuit inventory in store that has exceeded the date of expiry mentioned on the label. The goods are written off and subsequently destroyed. ITC of approximately ₹36 lakh (18% of ₹2 crore) attributable to the expired inventory is required to be reversed in GSTR-3B."

And the method for a high-SKU business. For expired creams, shampoos and colour cosmetics, "ITC reversal should be computed on a batch-wise basis by reference to the original purchase invoices (or on a standard cost basis where exact tracing is impractical)."

Standard costing is expressly permitted where tracing is impractical — which matters, because a personal care company destroying small quantities across hundreds of SKUs cannot realistically trace each to its purchase invoice.

Note that the trigger is the write-off or destruction, not the expiry date. Section 17(5)(h) speaks of goods "written off or destroyed"; stock that has passed its date but remains on the books is not yet within the clause.

Product recall: three outcomes

The Guide's scenarios for a quality-alert recall of packaged snacks:

The organising principle is whether the goods end up in a taxable outward supply. If they do, the credit has done its job. If they do not, section 17(5)(h) takes it back.

Which makes the recall decision itself a tax decision. A batch that can be reworked at a cost below the credit at stake is worth reworking even where the commercial case is marginal.

Fire, theft and the insurance point

"A company's warehouse catches fire and finished goods worth ₹5 crore are destroyed. Under Section 17(5)(h), ITC on 'goods destroyed' is blocked. Accordingly, ITC attributable to the destroyed goods is required to be reversed. Receipt of insurance proceeds does not reinstate ITC eligibility. The reversal must be made irrespective of insurance recovery."

The reason is that the two are unrelated events. The insurer indemnifies a commercial loss; the credit condition is that the goods be used for a taxable outward supply. Being compensated for goods that were destroyed does not make them used.

A practical consequence for claims. Because the ITC is irrecoverable, the GST component of the loss should be included in the insurance claim — it is a real cost of the event, not a recoverable tax.

Transit losses: normal against abnormal

This is the one place the Guide records genuine flexibility.

"Normal / expected transit losses: The goods cannot be said to have been 'destroyed' in the sense in which the same is employed in Section 17(5)(h) if the shortfall is within acceptable tolerance. Industry practice generally does not reverse ITC on marginal normal transit losses." "Abnormal transit losses (major accidents, large-scale damage): ITC reversal on such damaged / destroyed goods is more clearly required."

The argument for normal losses is definitional, not concessional. A degree of breakage and spillage is inherent in moving glass bottles and cartons; those goods were used in making the taxable supply, and the shortfall is a characteristic of the process rather than a destruction event.

But the burden is on the taxpayer to draw the line in advance: "FMCG companies should document their transit loss policy with reference to industry norms and maintain records to distinguish normal from abnormal losses."

A tolerance set after a loss is worth much less than one set before it. The policy needs to predate the claim.

The construction block, and the 2025 substitution

Section 17(5)(c) blocks works contract services for construction of immovable property other than plant and machinery; section 17(5)(d) blocks goods or services received for such construction on one's own account. "'Construction'… includes re-construction, renovation, additions or alterations or repairs to the extent of capitalisation in the books of accounts."

"Plant and machinery" means *"apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply… and includes such foundation and structural supports but **excludes — (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises."*

And note the amendment. The Finance Act, 2025, notified by Notification No. 16/2025-CT dated 17.09.2025, brought into force on 01.10.2025 but effective retrospectively from 01.07.2017, substituted "plant or machinery" with "plant and machinery" — closing an argument that had been run on the disjunctive.

The practical lines in an FMCG plant:

• civil construction of a factory building — blocked;
• mixing machines, baking ovens, packaging equipment fixed by bolts and structural supports — eligible;
• cold storage chamber structure — blocked; the refrigeration plant and compressors inside it — eligible;
• whitewashing and repairs charged to P&L — eligible; the same capitalised to the building — blocked.

Two practical instructions follow. "obtain separate invoices from contractors for civil work and machinery installation", and "review their capitalisation threshold policies" — because the accounting treatment now decides the credit.

Two things that are not exempt supplies for rule 42

Interest income. "Explanation 1(b) to Rule 43 (which applies to Rule 42 as well) specifically excludes interest/discount income from deposits or loans from the exempt-turnover figure used in the reversal formula — unless the company is a bank, financial institution, or NBFC. Since FMCG companies don't fall in that exception, their interest income is excluded from the denominator, and no common ITC reversal is triggered on that account."

Section 9(5) e-commerce supplies. Per Circular No. 240/34/2024-GST dated 31.12.2024, "supplies covered under Section 9(5) are taxable supplies and merely because the tax is discharged by the e-commerce operator does not alter the nature of the supply. Accordingly, such supplies shall not be treated as exempt supplies for the purpose of Rule 42 or Rule 43 and no reversal of common input tax credit is required."

Both are the same reasoning applied twice. Neither the payer of the tax nor the absence of a taxable outward supply changes the character of what was supplied.

What is included, by contrast, under section 17(3): RCM inward supplies, transactions in securities, sale of land, and sale of building subject to Schedule II para 5(b) — so an FMCG company selling surplus factory land triggers a rule 42 reversal even though the sale is not a supply at all.

Key takeaways

• Section 17(5)(h) blocks credit on goods lost, stolen, destroyed, written off, gifted or given as free samples.
• Expired stock must be reversed batch-wise by original invoice, or on a standard cost basis where tracing is impractical.
• Recall outcomes differ: reworked or relabelled and resold — no reversal; destroyed — reversal.
• Insurance proceeds do not reinstate ITC — include the GST in the claim.
• Normal transit losses within tolerance are not "destruction"; abnormal losses require reversal. Document the policy in advance.
• Section 17(5)(c) and (d) block construction credit; "plant or machinery" was substituted with "plant and machinery" retrospectively from 01.07.2017.
• Capitalised repairs are blocked; revenue repairs are not — so capitalisation policy drives the credit.
• Interest income (Explanation 1(b) to rule 43) and section 9(5) supplies (Circular No. 240/34/2024) are not exempt supplies for rule 42/43.

Read next

• Free Samples and Gifts: Section 17(5)(h) Against Schedule I Entry 1
• POS Materials, Visi Coolers and Branded Refrigerators Under GST
• Section 17(3): What Counts as an Exempt Supply for Reversal

Disclaimer: Positions stated as on 5 September 2026, based on sections 17(1), 17(2), 17(3) and 17(5) of the CGST Act, 2017, rules 42 and 43 of the CGST Rules, 2017, Notification No. 16/2025-Central Tax dated 17 September 2025 and Circular No. 240/34/2024-GST dated 31 December 2024, as reproduced in the ICAI GST Sectoral Guide on Fast-Moving Consumer Goods (July 2026).