[Amendment in Rule 43 of CGST Rules, 2017 vide Notification No. 16/2020 – Central Tax dated 23rd March, 2020]
The need of these provisions arises when taxable person avails input tax credit in respect of CAPITAL GOODS & provides supplies being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies. Amount of ITC attributable to supplies other than taxable (incl. zero rated supplies) shall be reversed in the below prescribed manner.
Rule 43 of CGST Rules, 2017; provides for manner of reversal in case of ITC on capital goods. The beautiful analysis of amendment can be made with the help of below table (column D is the amendment part): –
|Description of Provision
|Position post amendment vide NN 16/2020 CT
|Rule 43(1)(a)||Capital goods procured to effect exclusively exempt supply & non-business supply||ITC shall not be credited to his electronic credit ledger||Unchanged|
|Rule 43(1)(b)||Capital goods procured to effect exclusively taxable supply & zero-rated supply||ITC shall be credited to his electronic credit ledger||Unchanged|
|Rule 43(1)(c)||Capital goods procured to effect taxable supply as well as exempt supplies||“A”, shall be credited to the electronic credit ledger then will be reversed in proportion of exempt supplies.||Unchanged|
|Proviso to Rule 43(1)(c)||Capital goods procured to effect exclusively exempt supply & non-business supply now used for providing taxable as well as exempt supply.||“A” shall be arrived at by reducing the input tax at the rate of 5% p.q. for every quarter or part thereof and the amount “A” shall be credited to the electronic credit ledger||“A” as reflected in invoice be credited to electronic credit ledger.
ITC attributable to the period during which such capital goods were covered by clause (a), denoted as “Tie”, shall be calculated at the rate of 5% p.q. or part thereof and added to the output tax liability of the tax period in which such credit is claimed.
|Rule 43(1)(d)||“A” credited to the electronic credit ledger under clause (c), to be denoted as “Tc”, shall be the common credit in respect of capital goods||“A” credited to the electronic credit ledger under clause (c) in respect of common capital goods whose useful life remains during the tax period, to be denoted as “Tc”, shall be the common credit in respect of such capital goods.
Thus, what Tr was supposed to do is now inculcated into formula of Tc.
|Proviso to rule 43(1)(d)||Capital goods procured to effect exclusively taxable supply & zero-rated supply now used for providing taxable as well as exempt supply.||The value of “A” arrived at by reducing the input tax @ 5% p.q. or part thereof shall be added to the aggregate value “Tc”.||The input tax credit claimed in respect of such capital good(s) shall be added to arrive at the aggregate value “Tc”.
(Earlier reduced A was to be added in Tc & then was liable to be reversed)
|Rule 43(1)(e)||Input tax credit attributable to a tax period on common capital goods during their useful life, be denoted as “Tm”||Tm= Tc÷60||Unchanged|
|Rule 43(1)(f)||ITC, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, be denoted as “Tr”||Omitted vide NN no. 16/2020 – CT dt. 23.03.2020 w.e.f. 01.04.2020 (due to amendment in definition of Tc)|
|Rule 43(1)(g)||The amount of common credit attributable towards exempted supplies “Te”||Te = Tr x E/F||Unchanged
(It seems to be a typographic error by department since Tr has been omitted the formula shall stand revised as “Te = Tc x E/F”)
On careful analysis of provisions there can be 7 situations of capital goods which are summarised & tabulated below: –
|Capital Goods (CG) Used For: –||Impact on (Electronic Credit Ledger) ECL|
|1) Fully Taxable supplies||Fully Credit to ECL|
|2) Fully Exempt / non-business supplies||Do not credit to ECL|
|3) Partly Exempt/ Partly Taxable||Credit fully to ECL but to be reversed in below specified manner
“A” = Full ITC on such capital goods
|4) Earlier used for exclusive taxable supplies now will be used for exempt as well as taxable supplies||Would have been credited to ECL fully.
Now full “A” as reflected in invoice will be reversed in below specified manner.
|5) Earlier used for exclusive exempt supplies now will be used for exclusive taxable supplies||Available after reducing 5% per quarter or part thereof from Date of Invoice. [R. 40(1)(a) of CGST Rules]|
|6) Earlier used for exclusive taxable supplies now will be used for exclusive exempt supplies||Capital Goods after reducing ITC proportionately on the basis of usage life in months. [R. 44(1)(b) of CGST Rules]|
|7) Earlier exclusively used for non-business or exempt supplies now will be used for taxable & exempt supplies||Nothing would have been credited to ECL.
Now “A” i.e. ITC reflected in invoice be credited to ECL & then reversed in below specified manner.
Tie will be calculated @ 5% p.q. or part thereof for period during which CG was used for effecting exempt & non-business supply and be added to output tax liability in the month in which “A” is credited to ECL
Specified manner of reversal (R. 43 of CGST Rules)
1. Aggregation of Common Credit Tc
Tc = ∑A
(“A” credited to the electronic credit ledger under clause (c) in respect of common capital goods whose useful life remains during the tax period, to be denoted as “Tc”)
2. Calculation of Monthly Common Credit on Capital Goods i.e. Tm
Tm = Tc / 60 … (Since life is 5 years it is taken as 60 months)
3. Calculation of Common Credit Attributable towards exempt supplies: –
Te = (E / F) x Tr where; (instead of Tr it should be Tc. It seems to be error in law)
“E” is the aggregate value of exempt supplies during the tax period, and
“F” is the total turnover in the State of the registered person during the tax period
Exempt Turnover (E) includes the following S. 17(3) of CGST: –
> Non-taxable supply– Supplies not leviable to tax under GST. E.g. Alcoholic Liquor for human consumption
> Outward Supplies on which the recipient is liable to pay tax on reverse charge basis – it would be treated as exempt in the hands of the supplier and not recipient.
> Transaction in securities– Value shall be 1% of the sale value (Rule 45 of CGST Rules, 2017);
> Sale of Land– Value shall be stamp duty value;
> Sale of Completed Building on which GST is not applicable (sale after receipt of occupancy certificate or after first occupation) – Value shall be the same as adopted for stamp duty purposes.
(Value of exempt supplies shall not include Schedule III activities except Sale of Land & Completed Building – CGST Amendment Act, 2018)
& excludes the following: – Explanation to R. 43(1)
> Excise Duty & VAT applicable on 9(2) of CGST Act supplies & tobacco and tobacco products.
> Interest / Discount received on deposits, loans (except for Banks and other Financial Institutions) [Explanation to Rule 43]
> Services by Transport of Goods “by vessel” from customs station to place outside India [Explanation to Rule 43]
Total Turnover (F) in the State means: – Value of all taxable supplies (other than inward supplies covered under reverse charge) made within the State, Value of all exempt supplies made within the State, Exports, Inter State Supplies but excludes CGST, SGST, IGST and Compensation cess.
Other Points: –
1) If registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of E/F shall be calculatedby taking values of E and F of the last tax period for which the details of such turnover are available, previous to the month during which the said value of E/F is to be calculated.
2) The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax.
Important Comment: – It is important to note that unlike Rule 42 which mandates determination of the actual amount of reversal on the completion of the financial year (Refer Part 2 of Chapter), Rule 43 does not prescribe any re-computation at the end of the financial year.
Let us understand impact of amendment on practical business scenarios: –
Illustration 1: – (EXCLUSIVELY EXEMPT TO COMMON USE)
A Ltd. used a machine purchased on 1st January, 2018 for effecting exclusive exempt supplies. However, w.e.f. 1st April, 2020, the said machinery started to effect taxable as well as exempt supply. The cost of the machine was Rs. 2,00,000/- (excl. GST @ 18%). Thus, for the month of January, 2018 nothing would have been credited to ECrL.
Position pre-amendment: –
= 36,000 (-) 45% x 36,000 [9 Quarters * 5%] would be reduced and credited to ECrL…… [2,00,000 x 18% = 36,000]
= 19,800/- will be credited to ECrL.
Now Rs. 19,800 / 60 i.e. Rs. 330 was to be treated as Tm for the purpose of reversal in proportion of exempt supplies.
Position post-amendment: –
= 36,000 will be credited to ECrL as it is reflected on invoice.
However, Rs. 16,200 being attributable to period 1st January, 2018 to 31st March, 2020 [9 Quarters * 5% = 45%] would be termed as Tie and would be added in output tax liability in the tax period in which Rs. 36,000/- is credited.
Now, Rs. 36,000 / 60 i.e. Rs. 600 would be treated as Tm for the purpose of reversal in proportion of exempt supplies.
Illustration 2: (EXCLUSIVELY TAXABLE SUPPLIES TO COMMON USE)
ABC Limited, purchased a machinery worth Rs. 1,00,000/- (excl. GST @ 18%) on 1st January, 2018; the same was put to use for effecting EXCLUSIVELY taxable supplies. W.e.f. 1st April, 2020 the said machine was put to use for taxable as well as exempt supplies. Calculate A, Tc, Tm. The turnover for April, 2020 was as below: –
Taxable Turnover: – Rs. 50,00,000
Exempt Turnover: – Rs. 25,00,000
Total Turnover: – Rs. 75,00,000
|Amount credited to ECrL (on 1st January, 2018)||18,000||18,000|
|Calculation of Reversal as per Rule 43|
|(A) Total ITC||18,000||18,000|
|(B) 5% per quarter or part thereof||8,100||NA|
|Value of A for the purpose of Rule 43(1)(d)||9,900||18,000|
|Amount to be treated as “A” which would be liable to be reversed||9,900
[18000(-)5% per quarter x 9 quarters]
[Amount of A would itself become Tc]
|Tc = ΣA||9,900||18,000|
(This formula will be valid till its useful life is pending i.e. 5 years)
|Tr Te = Tm*E/F
(Te will be added to Output Tax Liability of the month of April, 2020)
[Rule 43(1)(g); states that Te = Tr * E/F, however, since clause f i.e. Tr is omitted the clause g shall also be stand amended as to “Te = Tm * E/F”. It seems drafting error of law, which shall be resolved in due course by way of issuance of notification]
Logic Behind the Amendment
Prior to amendment, input tax credit reduced by 5% p.q. was termed as “A” i.e. Tc, then it was divided by 60 instead of remaining useful life of asset. Logically “A” should have been divided by remaining useful life of the asset.
However, government came up with the solution to this and amended respective rule so as to provide that “Full ITC will be divided by 60” for the purpose of Tm (instead of dividing “A” by remaining useful life)
Impact of this amendment would entail higher reversal of ITC when capital goods for exclusive taxable supplies are put into common use.