Understand when Input Tax Credit (ITC) reversal is necessary in GST, including situations like failure to pay consideration, exempt supplies, and blocked credits.
Input tax credit (ITC) is the credit of GST, paid on procurement of goods or services, which can be utilised to discharge the GST liability on outward supplies. If the input tax credit is wrongly claimed, then it should be reversed by making payment to that extent of wrongly availed ITC. In certain situations, even if the basic conditions for claiming ITC is satisfied, ITC claimed must be reversed (e.g. Blocked Credits like health insurance, food & beverages expenses, etc.)
Reversal of ITC means the credit of inputs, input service, and capital goods utilized earlier would now be reversed, effectively nullifying the credit claimed earlier. Depending upon when such a reversal is done, payment of interest may also be required.
|
Relevant GST section/ rule |
Circumstances | Manner of ITC reversal |
| CGST Rule 37 | The recipient fails to pay consideration to the supplier (whether fully or partly) for a particular supply within 180 days | After 180 days from the date of issue of the invoice along with Interest |
| CGST Rule 37A | The supplier fails to pay tax through GSTR-3B by 30th September of the following year | On or before 30th November of the following financial year. |
| CGST Rule 38 | Reversal of 50% of ITC by Banking and Other financial companies under special rules | At the time of filing regular returns. |
| CGST Rule 42 | Inputs used to make an exempt supply or for manufacturing supplies which were partially used for non-business or personal purposes | On a periodic basis (monthly/yearly).
Proportion of reversal shall be the proportion of exempt supplies to total Turnover |
| CGST Rule 43 | Input taken on Capital goods/Plant and Machinery which were partially used for non-business or personal purposes | ITC reversal to be done to the extent that Capital goods are used for Non business purposes or personal purposes. |
| CGST Rule 44 | Cancellation of GST registration or switching to a composition scheme | While filing form REG-16 under various situations on the cancellation of GST registration or through ITC-03 while opting for a composition scheme. |
| Section 16(2) of CGST Act,2017 | ITC on goods/services, details of which are not furnished by the supplier in GSTR-1 | ITC cannot be availed /Utilised at the time of Filing GSTR-3B; otherwise, ITC needs to be reversed under applicable provisions of the law. |
| Section 16(3) of CGST Act, 2017 | Depreciation under the Income Tax Act has been claimed on the GST component of capital goods purchased | Reversal is required at the time of closing books of accounts for that financial year. |
| CGST Section 17(5) of CGST Act,2017 | ITC has been availed on ‘blocked credits.’ | At the time of filing regular returns up to the date of filing annual returns. |
So these are the major situations, which require ITC reversal. To avoid all these circumstances, a proper periodic review is to be done on a monthly/quarterly basis. Otherwise, on a year end, it will create a problem for reconciliation as well as interest will be applicable.
Authors:
Bhavya Shah | Associate Consultant | Email: bhavya.shah@masd.co.in
Disha Shah | Associate Consultant | Email: disha.shah@masd.co.in
Author Bio
GST payable even output GST is more than input GST
Banking company:
Exempted income: 15,00,000
Taxable Income: 7000
Input GST=7500
output GSt=1250
Even our Advisors say you have to pay GST Rs1260. and you get ITC only Rs 36
To getting ITC ,ourAdvisor calculated percentage of Taxable income/Agreegate
income
please Help me
Sir,
How far the reversal of ITC u/s 16(4) is justified when late fees is paid on late filing of return u/s 47. In my view, no reversal of ITC is needed due to the following case laws of Supreme court; 1..(2021) 35 J.K.Jain’s GST & VR 167 : Skill Lotto Solutions Pvt. Ltd. v. Union of India (SC 2.. (2021) 35 J.K.Jain’s GST & VR 402 : Government of Kerala v. Mother Superior Adoration Convent (SC) refer my detailed article in the magazine (2023) 39 J.K.Jain’s GST & VR, {Page R-15-R-16.
CA Om Prakash Jain s/o J.K.Jain, Jaipur