Question:
A medicine retailer has stock worth ₹30 lakhs (purchased at GST rates of 12%, 18%, and 28%) as on 05-09-2025. From 22-09-2025, the Government reduces the GST rates. What is the procedure for stock adjustment and how should the dealer deal with any tax rate difference or loss under GST?
Answer:
When GST rates are reduced, treatment of stock purchased at higher rates but sold after the reduction depends on whether the supply remains taxable or becomes exempt/nil-rated.

1. Case A – Supply continues to be taxable (rate reduced but > 0%)

• The dealer has already availed Input Tax Credit (ITC) on purchases at higher rates (12%, 18%, 28%).
• On sales after 22-09-2025, the dealer must charge GST only at the revised lower rate.
• This creates an inverted duty structure (inputs taxed higher, output taxed lower).

🔹 Relevant Rule: Rule 89(5) – Refund of unutilised ITC due to inverted duty structure.

• Dealer may claim refund of accumulated ITC, provided the goods are not in the blocked category under Notification No. 5/2017-CT (Rate).
• Refund = Net ITC × (Turnover of inverted rated supply ÷ Adjusted total turnover) − Tax payable on such inverted supplies.

👉 Result:
No ITC loss. Credit can either be used to pay output GST over time or refunded (if refund conditions are satisfied).

2. Case B – Supply becomes nil-rated or exempt

• From the effective date, the output supply is exempt, so ITC on related stock cannot be used.
• ITC already availed on such stock must be reversed.

🔹 Relevant Rule: Rule 44 – Reversal of ITC on inputs, inputs in semi/finished goods, and capital goods when supply becomes exempt.

• Dealer must file Form GST ITC-03 and pay back the ITC proportionate to stock held on the day immediately preceding the date of exemption.
• If invoices are not available, reversal is calculated based on prevailing market value of stock, certified by a CA/cost accountant.

👉 Result:
The reversed ITC becomes a real cost to the dealer and should be added to inventory value as per accounting standards.

3. Accounting Treatment

• If ITC continues to be available (Case A), it remains an asset (credit ledger balance).
• If ITC is reversed (Case B), the tax amount must be added to cost of inventory, increasing cost of sales when stock is sold.

✅ Final Conclusion

• If medicines remain taxable → ITC is safe. Only an inverted duty situation arises, and the dealer can claim refund of unutilised ITC under Rule 89(5).
• If medicines become exempt/nil-rated → ITC reversal is mandatory under Rule 44, resulting in an actual cost/loss to the dealer.

Thus, the “loss” arises only when supplies become exempt, not merely when rates are reduced but remain taxable.

📌 GST Rate Reduction on Dealer’s Stock – Adjustment & Loss Treatment
A common doubt arises when a GST dealer has stock purchased at higher tax rates (12%, 18%, 28%), and later the Government reduces GST rates. Let’s understand how to deal with such stock under GST law, what rules apply, and when a dealer may actually suffer a loss.

✅ 1. When the Supply Remains Taxable (Rate Reduced but Not Zero)

• The dealer has already availed Input Tax Credit (ITC) on purchases at higher rates.
• After rate reduction, the dealer must charge GST at the new lower rate on sales.
• This creates an inverted duty structure (inputs taxed higher, output taxed lower).

🔹 Relevant Rule: Rule 89(5) of CGST Rules – Refund of unutilised ITC in case of inverted duty.
➡️ What this means for the dealer:

• ITC remains fully available.
• If output liability is less than input credit, the balance ITC may accumulate.
• Refund of accumulated ITC can be claimed under Rule 89(5), provided the goods are not restricted under Notification No. 5/2017-CT (Rate).
• Hence, there is no GST loss in this situation, only a working capital blockage until refund/adjustment.

✅ 2. When the Supply Becomes Nil-Rated or Exempt

• If the Government reduces the rate to 0% (nil-rated) or makes the goods exempt, then the situation changes completely.
• From the effective date, ITC on such stock is not allowed.

🔹 Relevant Rule: Rule 44 of CGST Rules – Reversal of ITC on inputs, semi-finished goods, finished goods and capital goods when supplies become exempt.
➡️ Dealer’s compliance requirements:

• ITC attributable to stock held on the day immediately before exemption must be reversed.
• This is done by filing Form GST ITC-03 and paying back the ITC.
• If invoices are available, reversal is done invoice-wise; if not, stock must be valued at market price and certified by a CA/cost accountant.
• The ITC reversed becomes a real cost and is normally added to the inventory value for accounting purposes.

👉 In this case, there is an actual GST loss to the dealer.

✅ 3. Accounting Treatment of ITC

• If ITC remains valid (taxable supplies), it continues as a credit balance in the electronic credit ledger.
• If ITC is reversed due to exemption, it is treated as part of the cost of inventory and reduces business profit margin when stock is sold.

✅ 4. Key Takeaways for GST Dealers
✔️ If supply remains taxable even at a lower rate, ITC is safe and may be refunded in inverted duty cases under Rule 89(5).
✔️ If supply becomes nil-rated or exempt, ITC reversal is mandatory under Rule 44 using ITC-03.
✔️ The real GST loss arises only when goods are exempted, not merely when the rate is reduced but still taxable.
✔️ Dealers should capture closing stock details as on the day before rate change, calculate ITC precisely, and maintain proper invoices/CA certification as required by GST rules.

 Final Conclusion:
For a GST dealer holding stock purchased at higher tax rates, a mere rate reduction does not cause ITC loss — refund of unutilised credit is possible under Rule 89(5). However, if the goods become exempt or nil-rated, ITC must be reversed under Rule 44, which leads to an actual loss that must be added to inventory value.