GST Implications for Department Store Vendors: Stock Exemption Analysis

 The recent GST reforms effective September 22, 2025, have significant implications for department store vendors who hold goods in stock that have transitioned from taxable to exempt status. This analysis examines the Input Tax Credit (ITC) reversal requirements, compliance obligations, and practical implementation strategies based on current notifications, GST Council recommendations, and official FAQs.

Executive Summary and Key Findings

Department store vendors with goods in stock that have become exempt under the new GST regime face mandatory ITC reversal obligations under Section 18(4) of the CGST Act, 2017. The transition requires immediate attention to avoid penalties and ensure compliance with the revised framework effective September 22, 2025.

Critical Action Required: Vendors must calculate and reverse ITC on exempt stock in their September 2025 GST returns, as the exemption triggers Section 18(4) provisions that mandate reversal when "goods or services supplied become wholly exempt"

ITC Reversal Process When Goods Become Exempt Under GST

Legal Framework and Statutory Provisions

Section 18(4) - Core Reversal Requirement

Section 18(4) of the CGST Act, 2017, mandates ITC reversal in two specific scenarios:

1.       When a registered person opts for the composition scheme under Section 10

2.       When goods or services supplied become wholly exempt from GST

The provision states that the registered person "shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax" previously availed.

Rule 44 - Calculation Methodology

Rule 44 of the CGST Rules, 2017, prescribes the calculation method for ITC reversal in cases where supplies become wholly exempt. The rule requires different treatment for various categories of goods:

For Inputs and Semi-finished/Finished Goods: Reversal calculated proportionately based on original purchase invoices
For Capital Goods: Pro-rata reversal based on remaining useful life (typically 5 years from purchase date)
For Common Inputs: Proportionate reversal using the formula specified in Rules 42 and 43

Notification Analysis and Implementation Timeline

Key Notifications Effective September 22, 2025

Notification 09/2025-CTR dated September 17, 2025: Implements revised GST rates, reducing multiple goods from taxable to exempt status

Notification 10/2025-CTR dated September 17, 2025: Supersedes previous exemption notifications and provides an updated comprehensive list of exempt goods

FAQ on 56th GST Council Decisions: Clarifies that ITC must be reversed for supplies becoming exempt, while rate reductions (not exemptions) do not trigger reversal requirements

Practical Implications for Department Store Vendors

Stock Categories Requiring ITC Reversal

Food Items Now Exempt:

·       Ultra-High Temperature (UHT) milk

·       Pre-packaged paneer and chena

·       Pizza bread, khakhra, chapati, roti

·       Paratha, parotta and other Indian breads

Healthcare Products:

·       33 specified life-saving drugs

·       Various medical devices and instruments

·       Individual health and life insurance services

Personal Care Items:

·       Hair oil, toilet soap bars, shampoos

·       Toothbrushes, toothpaste, dental care products

Calculation Examples and Practical Application

Example Scenario: A department store purchased toilet soap bars worth ₹100,000 at 18% GST (ITC of ₹18,000) in August 2025. With effect from September 22, 2025, toilet soap bars become exempt. The vendor must reverse the full ₹18,000 ITC in their September 2025 GST return.

Capital Goods Treatment: For capital goods like refrigeration equipment used to store goods that become exempt, reversal is calculated pro-rata based on remaining useful life. If equipment was purchased 2 years ago (₹10,000 ITC claimed), the reversal would be: ₹10,000 × (36 months remaining/60 months total) = ₹6,000.

Compliance Requirements and Procedural Aspects

Reporting and Documentation

Form ITC-03: Mandatory for reversals under Section 18(4) when goods become exempt. This form must be filed separately from regular GSTR-3B returns.

GSTR-3B Reporting: ITC reversal must be reported in the appropriate sections of GSTR-3B for the September 2025 tax period.

Supporting Documentation: Maintain detailed records of:

·       Original purchase invoices with ITC details

·       Stock valuation as of September 21, 2025

·       Calculation worksheets for reversal amounts

·       Proof of goods classification under new exemption notifications

Timeline and Penalties

Immediate Action Required: ITC reversal must be completed in the GST return for September 2025, the month when exemption becomes effective.

Penalty Structure: Non-compliance attracts penalties under Section 122 of the CGST Act:

·       10% of tax amount or ₹10,000 (whichever is higher) for non-fraudulent cases

·       100% of tax amount or ₹10,000 (whichever is higher) for fraudulent cases

Interest Implications: Interest under Section 50 may apply if reversal is delayed beyond the prescribed timeline.

Distinguished from Rate Reduction Scenarios

Critical Distinction - Exemption vs. Rate Reduction

The analysis reveals a crucial distinction that vendors must understand: rate reductions do not trigger ITC reversal, but exemptions do.

Rate Reduction (No Reversal Required): When goods move from 18% to 5% GST, they remain taxable at a lower rate. Section 18(4) does not apply as supplies haven't become "wholly exempt".

Exemption (Reversal Required): When goods move from any taxable rate to 0% (exempt), they become "wholly exempt" and trigger Section 18(4) reversal requirements.

CBIC Circular 135/05/2020 Clarification: This circular specifically clarifies that refunds are not available when rates change on the same goods over time, emphasizing the distinction between rate changes and exemptions.

Recommendations and Best Practices

Immediate Action Plan

1.       Stock Audit: Conduct comprehensive inventory analysis to identify goods that have become exempt under new notifications

2.       ITC Calculation: Calculate exact ITC amounts subject to reversal using Rule 44 methodology

3.       Documentation Preparation: Compile all supporting documents for compliance purposes

4.      System Updates: Update accounting and GST compliance systems to reflect new exemption status

5.       Return Filing: Ensure timely filing of ITC reversal in September 2025 returns

Strategic Considerations

Inventory Management: Consider adjusting procurement strategies for newly exempt goods to minimize future ITC reversals.

Pricing Strategy: Evaluate pricing implications as exempt goods cannot be sold with GST, potentially affecting profit margins.

Supplier Relationships: Communicate with suppliers regarding the exemption status to ensure proper invoicing and documentation.

Conclusion

Department store vendors holding stock of goods that have become exempt under the September 2025 GST reforms face mandatory ITC reversal obligations under Section 18(4) of the CGST Act. The exemption of goods from GST, unlike rate reductions, constitutes a fundamental change in tax status that requires immediate compliance action. Vendors must calculate and reverse ITC on affected stock in their September 2025 GST returns, maintain proper documentation, and implement robust compliance procedures to avoid penalties. The distinction between exemptions and rate reductions is critical for determining reversal obligations, with only complete exemptions triggering Section 18(4) requirements. Proactive compliance measures, including comprehensive stock audits and timely return filing, are essential for navigating this transition successfully.

- LDR

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