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GST and paperwork
GST When You Sell Old Stock, Damaged Stock or Scrap
Clearing aged inventory, surplus factory rejects, or warehouse scrap raises immediate tax questions for business owners and accountants. If you sell goods below your original purchase cost, do you charge GST on the discounted sale price or the original invoice value? And what happens to the Input Tax Credit (ITC) you claimed when you first bought the goods?
Misinterpreting these rules can trigger audit notices from GST authorities or cause businesses to reverse legitimate tax credits unnecessarily.
Here is how Indian GST law treats discounted inventory sales, damaged write-offs, and industrial scrap disposal.
1. Selling old stock below cost: transaction value rule
Under Section 15 of the CGST Act, 2017, GST is payable on the transaction value, the actual price paid or payable for the goods when sold between unrelated parties.
- Discounted clearance rates: If you purchased raw materials at ₹500 per unit two years ago and now liquidate them at ₹180 per unit because the design is obsolete, you charge GST on ₹180.
- No minimum floor price: GST law does not mandate selling goods at or above purchase cost. Commercial distress, obsolescence, and godown clearance are recognized business realities.
- Invoice transparency: Issue a standard GST tax invoice showing the agreed clearance rate, the applicable GST percentage, and HSN code.
Calculate the exact tax split on your selling price using our free GST calculator before issuing your invoice.
2. Input Tax Credit: sales versus write-offs
The crucial tax distinction lies between selling at a discount and writing off inventory completely:
| Scenario | Do you charge GST on sale? | Must you reverse original ITC? | Relevant section |
|---|---|---|---|
| Sold at deep discount / clearance | Yes, on actual sale price | No ITC reversal required | Section 15(1) |
| Destroyed, lost, or stolen goods | No sale occurs | Yes, 100% ITC must be reversed | Section 17(5)(h) |
| Written off completely in books | No sale occurs | Yes, ITC must be reversed | Section 17(5)(h) |
| Disposed of as industrial scrap | Yes, at scrap GST rates | No ITC reversal on scrap sold | Section 15 & HSN |
Under Section 17(5)(h) of the CGST Act, input tax credit is blocked and must be reversed if goods are:
- Lost, stolen, or destroyed.
- Written off completely in financial accounts.
- Disposed of by way of gift or free samples.
If you write off old inventory as zero value in your audited balance sheet without selling it, tax officers will demand reversal of the original ITC claimed in GSTR-3B. However, if you sell that same inventory as a commercial stock lot, even for ₹10 per kg, it constitutes a taxable supply under Section 7, and no ITC reversal is attracted.
3. Selling industrial metal scrap and waste
When factory surplus or damaged machinery is cut down and sold as scrap, specific tax rules apply:
- Correct HSN classification: Do not bill scrap under the original finished product HSN. Metal scrap carries dedicated tariff headings under Chapter 72 (ferrous iron/steel scrap) and Chapter 74–76 (copper, brass, aluminium scrap).
- Reverse Charge Mechanism (RCM): Review current notifications regarding metal scrap. Sales of specified metal scrap by unregistered persons to registered dealers, or specific B2B metal scrap categories, carry reverse charge obligations.
- TCS under Income Tax: Scrap sales are also subject to 1% Tax Collected at Source (TCS) under Section 206C(1) of the Income Tax Act if the buyer does not provide a declaration for manufacturing use.
Browse registered industrial scrap traders and recyclers under Metals, Steel, Alloys & Scrap on Bikwao.
4. Documentation needed during tax scrutiny
When clearing large volumes of surplus inventory below book value, maintain a clean audit trail:
- Management approval: An internal board resolution or partner authorization documenting the business decision to liquidate slow-moving stock.
- Detailed stock lot invoice: Clear description of goods, carton counts, and explicit mentions of "surplus clearance" or "factory seconds."
- Transport documentation: Generated e-way bill with Part B completed and physical lorry receipts (LR) confirming genuine dispatch from your godown.
- Bank payment realization: Bank statement entries showing payment received directly from the buyer's registered current account.
This documentation proves that the liquidation was a genuine arm's-length transaction and shields your business from tax department inquiries regarding undervalued sales.
Questions
If I sell inventory at an 80% loss, do I have to reverse ITC?
No, provided the sale is a genuine taxable supply to an unrelated buyer with a proper GST invoice. ITC reversal under Section 17(5)(h) applies when goods are written off, destroyed, or given away without consideration, not when sold at commercial clearance discounts.
Can an unregistered buyer purchase scrap or surplus stock?
Yes. You can issue a B2C tax invoice charging the applicable GST rate. However, if the consignment value exceeds ₹50,000, an e-way bill must still be generated for transport.
What HSN code should I use for surplus mixed goods?
Never use a generic or made-up HSN. If the lot contains mixed items, either list each item on separate invoice lines with its respective HSN code, or classify the lot under the predominant product category in accordance with General Rules of Interpretation under the GST Tariff.
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