In the realm of Goods and Services Tax (GST), businesses navigate the intricacies of Input Tax Credit (ITC) and its reversal under Rule 42 and Rule 43. This article elucidates the regulations, calculation methods, and offers an illustrative example for clarity.
While paying taxes to the Government, businesses can use the credit of GST paid on the purchases like goods/services used for manufacturing or selling products. It is known as an ITC (Input Tax Credit).
If Input tax credit is wrongly claimed, then it is to be reversed by making the payment to that extent next month or reduced from ITC in hand.
Rule 42 in CGST Rules talks about a specific case of reversal of ITC – Inputs used to make an exempt supply or for manufacturing supplies some of which were used for non-business or personal purposes.
Rule 43 in CGST Rules says reversal of ITC wherein Capital goods used to make an exempt supply or for manufacturing supplies some of which were used for non-business or personal purposes.
Reversal Mode – On a Periodic basis/monthly basis using the Common Credit formula.
Common Credit formula to be used where the ITC amount cannot be attributable to a specific supply but is used for partly making both the taxable and non-taxable supplies/supplies used for personal consumption.
Treatment:
- Taxpayers must identify and reverse the proportionate ITC amount to the extent of supplies that are non-taxable/used for personal consumption.
- The remaining ITC left is eligible for the claim.
The ITC reversal will be calculated on the basis of the following formula,
- The total input tax involved on inputs and input services in a tax period, be denoted as “T”,
- The amount of input tax, out of “T”, attributable to inputs and input services intended to be used exclusively for purposes other than business, be denoted as ‘T1’.
- The amount of input tax, out of “T”, attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as ‘T2’.
- The amount of input tax, out of “T”, in respect of inputs and input services on which credit is not available under Section 17(5), be denoted as ‘T3’.
The amount of input tax credit credited to the electronic credit ledger of the registered person, be denoted as ‘C1’ and calculated as,
C1 = T-(T1+T2+T3)
- The amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero-rated supplies, be denoted as ‘T4’.
Input tax credit left after attribution of input tax credit shall be called common credit, be denoted as ‘C2’ and calculated as,
C2 = C1-T4
- ‘E’ is the aggregate value of exempt supplies during the tax period.
- ‘F’ is the total turnover in the State of the registered person during the tax period.
The amount of input tax credit attributable towards exempt supplies, be denoted as ‘D1’ and calculated as,
D1 = (E / F) x C2
The amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as ‘D2’.
D2= 5% of C2
The remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting supplies other than exempted supplies but including zero-rated supplies and shall be denoted as ‘C3’.
C3 = C2-(D1+D2)
Based on the above calculations, D1 and D2 are the reversible ITC.
Illustration: Consider the following scenario for the month of December 2022 in relation to supplies made in Delhi,
Total ITC available (T): 1,50,000
ITC on inputs attributable to supply used by Director/partner for personal use (T1): 7,500
ITC on inputs to be used exclusively for making exempt supply (T2): 18,000
Blocked Credits u/s 17(5) (T3): 4,000
ITC on inputs used exclusively for making taxable supplies (T4): 1,00,000
The aggregate value of exempt supplies made in December (E): 3,00,000
Total turnover in Delhi (F): 30,00,000
Solution:
C1 = T – (T1+T2+T3);
C1 = 1,50,000 – (7,500+18,000+4,000),
C1 = 1,20,500
The common credit C2 = C1–T4,
C2 = 1,20,500-1,00,000 ,
C2 = 20,500
D1 = (E÷F)×C2
D1 = (3,00,000 ÷ 30,00,000) × 20,500,
D1 = 2,050
D2 = 5% of C2,
D2 = 5% of 20,500
D2 = 1,025
C3 = C2–(D1+D2)
C3 = 20,500-(2,050+1,025)
C3 = 17,425
So, out of the originally available ITC of Rs. 1,50,000, only C3 (Rs. 17,425) and T4 (Rs. 1,00,000) were credited ultimately to the electronic credit ledger.
D1 (Rs. 2,050) and D2 (Rs. 1,025) are required to be reversed.
Conclusion: Navigating the complexities of GST rules, especially Rule 42 and Rule 43, is crucial for businesses to ensure compliance. Understanding the common credit formula and its application through practical examples enhances clarity on the reversal of Input Tax Credit, contributing to efficient tax management.
Author Bio
