Rule 56 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.
Manufacturing generates loss. Some of it is inherent in the process, and the credit on it survives. Some of it is not, and the credit must be reversed.
Rule 56(12) is the record that tells the two apart.
"Every registered person manufacturing goods shall maintain monthly production accounts showing quantitative details of raw materials or services used in the manufacture and quantitative details of the goods so manufactured including the waste and by-products thereof."
The three elements
Monthly. Not annual, not per batch, not on demand. A production account prepared at year end from a year's issues is not a monthly production account.
Quantitative details of raw materials or services used. Inputs consumed, by quantity — and note that services used in manufacture are within the requirement, which is unusual and rarely reflected in practice.
Quantitative details of goods manufactured, including waste and by-products. Output, waste and by-products, all quantified.
Why it decides the section 17(5)(h) question
Section 17(5)(h) blocks credit on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Normal process loss — evaporation, trimming, moisture loss, burning loss, invisible waste — is not within that list. The inputs were used in the manufacture of the output, not lost. The settled position, carried over from central excise, is that credit on inputs contained in normal process loss is not reversible, provided the loss is inherent, within technical or industry norms, and evidenced by input-output records. Section 17(5)(h) →
That last condition is Rule 56(12). Without a monthly production account:
- there is no evidence that the loss occurred in the process rather than after it;
- there is no comparison against a normal norm;
- the department's characterisation of the shortfall as an unaccounted supply under s.35(6) is difficult to answer.
Building a defensible norm
Establish the norm from technical data. Process yields from plant design, trial runs, supplier specifications, or published industry standards.
Record it before the period, not after. A norm derived from the year's actual loss is a description, not a standard.
Reconcile monthly, actual against norm, with variances explained.
Distinguish the categories:
| Loss | Treatment |
|---|---|
| Inherent process loss within norms | Credit retained; no reversal |
| Loss above norms, explained — a machine failure, a spoiled batch | Abnormal; credit reversed under s.17(5)(h) |
| Waste with realisable value — scrap, trimmings | Sold as a taxable supply; credit retained |
| By-products | An output, taxable on supply |
| Unaccounted shortfall | s.35(6) — taxed as if supplied |
The fourth row is the one that recovers value. Scrap and waste sold are taxable supplies, and the credit on the inputs that became them is retained because they were used in manufacture and are being supplied. Reversing credit on scrap that is subsequently sold is an over-reversal. Blocked credit common errors →
The by-product point
Rule 56(12) names by-products expressly, and they are frequently unrecorded because they carry no standard cost.
A by-product is an output. When supplied, it is a taxable supply at its own rate and classification. It enters the stock account under Rule 56(2), which requires the balance of stock including raw materials, finished goods, scrap and wastage.
An unrecorded by-product that is nevertheless sold produces a turnover the books do not explain — which is the pattern s.35(6) exists to catch.
Rule 56(13): the services equivalent
"Every registered person supplying services shall maintain the accounts showing quantitative details of goods used in the provision of services, details of input services utilised and the services supplied."
Less demanding, but frequently ignored altogether. A service provider consuming goods — consumables, spares, materials — must show them quantitatively.
Practical notes
- Generate the production account monthly from the ERP, not from a spreadsheet reconstructed later.
- Include services used in manufacture — job work, processing, testing — as the rule requires.
- Record waste and by-products by quantity, even where they carry no cost.
- Document the normal loss norm with its technical basis, and review it when the process changes.
- Reconcile to the stock account under Rule 56(2) and to the GSTR-9 Table 17 HSN summary.
- Keep the file for the s.36 period — seventy-two months from the annual return due date. Document retention →
Key takeaways
- Rule 56(12) requires monthly production accounts with quantitative input and output details.
- Services used in manufacture are within the requirement.
- Waste and by-products must be quantified.
- The account is the evidence that distinguishes normal process loss from abnormal loss.
- Scrap sold is a taxable supply, and reversing credit on it is an over-reversal.
- Without the account, a shortfall is exposed to s.35(6) — taxed as if supplied.
Read next
- Section 17(5)(h): Goods Lost, Stolen, Destroyed or Written Off
- Rule 56: The Accounts Every Registered Person Must Keep
- Rule 56(6): Undeclared Storage Taxed as Supplied
- Twelve Common Blocked Credit Errors
Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition).