GST: CBIC prescribes procedures for returning expired drugs

The Central Board of Indirect Taxes and Customs (CBIC) has laid down detailed procedure for returning time-expired drugs or medicines under the Goods & Services Tax (GST) regime. The same procedure can be used for other sectors too, where goods are returned under similar situations.

The common trade practice in the pharmaceutical sector is that the drugs or medicines are sold by the manufacturer to the wholesaler and by the wholesaler to the retailer on the basis of an invoice or bill of supply. After the expiry date, unsold quantities are returned to the manufacturer. Since, taxes are already paid on such medicine, the issue was how to get back taxes paid on unsold quantity under GST regime. The CBIC has now issued a circular detailing the procedure.

Harpreet Singh, Partner at KPMG, said the circular clarifies options available for returning the expired medicines.

As an alternative to issuing a credit note by supplier, the circular clarifies that the return of medicines can also be treated as a fresh supply and effected under cover of tax invoice/ bill of supply, as the case may be.

“The intent of the circular is to validate the common trade practices that exist in the pharmaceutical sector with respect to return of time-expired medicines,” he said.

Fresh supply

The circular has given two options for return of time-expired goods — to be treated as fresh supply or by issuing credit note. Under the first option, if the business returning goods is a registered entity, it may issue a tax invoice by considering the return as a fresh supply. The value of fresh supply will be equal to the value of the original supply made earlier. The recipient of the returned goods will be eligible to claim Input Tax Credit (ITC) on the basis of such tax invoice. If expired drugs are destroyed by the manufacturer, then he is required to reverse ITC availed on the return supply. The reversal is to be made on the ITC availed on such returned supply, and not on the original supply of goods.

In case the person returning goods is a composition dealer, he may issue a bill of supply, by considering the return as a fresh supply.

Further, the recipient of the returned goods shall not be eligible to claim ITC in the said case. If the person returning goods is an unregistered person, he may return the goods by issuing a commercial document without charging any tax on the same.

Issuing credit notes

The second option is to issue credit notes. The manufacturer/wholesaler may issue a tax credit note and the goods may be returned under the cover of a delivery challan. Accordingly, the manufacturer/ wholesaler will be able to claim a tax adjustment, subject to reversal of credit by the recipient of tax credit note.

The said credit notes are to be issued before September following the end of financial year. In case the said credit notes are not issued within the said deadline, a commercial credit note may be issued by manufacturer/ wholesaler.

MS Mani, Partner at Deloitte India, said by clarifying that expired products can also been returned as fresh supplies, unless a credit note has already been issued for such returns, some concerns on the loss of ITC have been addressed. “While the circular refers to the pharma sector, the methods specified could also apply to other sectors having similar issues,” he said.