There are many doubts comes in our mind whether we need to reverse the common ITC related to Interest Income because it represents the part of turnover.
I wish to clarify that there is no such reversal at all for the registered person other than a banking company or a financial institution including a non-banking financial company. For the purpose of clarity, I want to discuss some provision of the law.
First question comes in our mind is that whether interest income is the part of the aggregate turnover or not ?
As per the definition provided in Section 2(6) of CGST Act, 2017 aggregate turnover includes the aggregate value of all exempt supplies. Since interest income is exempt supply as per the Notification No. 12/2017 – Central Tax (Rate) therefore it becomes the part of aggregate turnover.
It is important to note here that taxpayer providing Taxable and NIL Rated Supply will have to apportion eligible ITC between taxable and exempt supplies.
Section 17(2) of CGST Act, 2017 states about the apportionment of credit between taxable including zero-rated supplies and exempt supplies according to which where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. Hence, we need to reverse the eligible ITC for the exempt supplies. The procedure and formulae for reversal of ITC on Input and Input services are given in Rule 42 of CGST Rules, 2017 and reversal of ITC in respect of capital goods has to made in accordance with Rule 43 of CGST Rules, 2017.
Value of exempt supply for the purpose of section 17(2) is determined under section 17(3) of CGST Act, 2017. But there is an explanation given in the Rule 43 of CGST Rules, 2017 which states that: For the purposes of rule 42 and this rule, it is hereby clarified that the aggregate value of exempt supplies shall exclude the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances.
Hence, if the registered person is a banking company or a financial institution including a non-banking financial company then the reversal of Common ITC will be done as per the provisions stated in section 17(2) of CGST Act, 2017. For all other registered persons interest income will not be considered as exempt supply and therefore no reversal of common ITC required.
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What abt security ??
As per section 17(3), Exempt supply under 17(2) shall be such as may be prescribed, and shall include the following :
√ supplies on which the recipient is liable to pay tax on reverse charge basis
√ transactions in securities
√ sale of land
√ subject to clause (b) of paragraph 5 of Schedule II, sale of building
The value of exempt supplies shall not include the value of activities or transactions specified in Schedule III (activities neither treated as supply of goods nor service) except those specified in paragraph 5 (sale of land and building) of the said Schedule. For the purpose of Section 17(3), in the following cases, value of exempt supply shall be as follows:
√ value of land of building :- as adopted for the purpose of paying stamp duty
√ value of security :- 1% of sale value of such security