When medicines are supplied by wholesalers to retailers in large quantities and the retailers are not able to sell all the supplies before their expiry date, the drugs are returned by them. Under GST, such expired medicines can be returned in the ways explained below.
This article discusses the following topics:
Medicines are significant to people’s health, and therefore they are purchased with extreme caution. The first things customers check while buying drugs is their expiration date. Usually, the manufacturer or wholesaler first sells the medicines to the retailers and then the retailers further sell the said drugs to their customers. A tax invoice is issued for taxable goods and a bill of supply is issued for exempted goods.
However, it is a usual occurrence that the retailer may fail to sell the whole stock of his/her medicines before they expire. Since, customers would not purchase an expired products, the retailer will be forced to return the medicines to the manufacturer or wholesaler through the supply chain.
In such a case, the Goods and Services Tax (GST) has proposed two options to the wholesaler and the retailer:
- To treat the returned expired drugs as fresh supply, or
- To return the expired drugs by issuing a credit note.
These procedures were issued in the GST circular dated October 26th, 2018.
If the wholesaler or retailer chooses to treat the returned expired medicines as fresh supply, then there will be three scenarios in this:
- Goods are being returned by a registered person
- Goods are being returned by a composition dealer
- Goods are being returned by an unregistered person
|Scenarios||Registered Person||Composition Dealer||Unregistered Person|
|Document Issued||Invoice and Charge Tax (bill of supply for exempt goods)||Bill of Supply||Any commercial document without charging tax|
|Value||As shown in invoice, or based on which goods were supplied previously||As shown in invoice, or based on which goods were supplied previously||As shown in invoice, or based on which goods were supplied previously|
|Will ITC be available?||Yes, wholesaler or manufacturer can avail ITC on the levied tax (if other conditions of CGST Act Section 16 are fulfilled)||No ITC||No ITC because of no tax charged|
The manufacturer or wholesaler will incur the following implications:
- Expired goods will have to be destroyed upon being received by the wholesaler.
- Return of expired goods will be recorded as purchases by the wholesaler for being treated as fresh supply.
- ITC availed on such goods under the CGST Act Section 17(5)(h) will have to be reversed by the manufacturer as no ITC will be available for the said goods which will have been destroyed in the end. The reversed ITC on destruction of expired goods should be the availed ITC and not the attributable ITC to the manufacturer/wholesaler.
The wholesaler may also choose the option to return medicines through issuance of a credit note for them. This retailer or wholesaler returning the medicines may then issue a delivery challan. The following steps may take place while returning expired medicines by issuing credit note:
Step 1 – The manufacturer or wholesaler may issue a credit note to the wholesaler or retailer returning expired goods
Step 2 – The wholesaler or retailer may return the expired goods along with a delivery challan.
There may be two scenarios related to the time specified in the CGST Act Section 34(2) for issuing a credit note on the return of expire goods:
- Credit note is issued within the time limit: The supplier may adjust the tax liability only if ITC has not been availed by the person returning the expired medicines. In case ITC has been availed by the said person, the same will have to be reversed by him/her against the returned goods.
- Credit note is not issued within the time limit: The supplier can still issue the credit note but cannot adjust the tax liability. The supplier will not have to declare such a credit note on the common portal because the tax liability is not adjustable.
Upon receiving the expired medicines, the manufacturer will destroy those drugs and reverse the ITC attributable to their manufacture.