In GST regime as well as in the previous regime, ITC on exempted supply of goods or services shall be reversed and not eligible for availment. One such exempted supply is sale of shares/mutual funds. ITC reversal on such supply is discussed as below:
ITC restriction on exempt supply:
Section 17(2) & 17(3) of CGST Act provides that when goods or services or both are used partly for the purpose of effecting taxable supplies and partly for effecting exempt supplies, the amount of credit shall be restricted and allowed only for the input tax that is attributable to the taxable supplies. Also, the ITC proportionate to the exempt supply shall be reversed.
Whether Mutual Fund is an exempt supply:
Section 2(47) defines exempt supply to include nil rated supplies and non-taxable supplies. Hence if a supply falls under the category of non-taxable supply, it shall also be treated as exempt supply only.
S.2(52) read with S 2(102) of the CGST Act vide their definitions, excludes securities from the scope of goods and services.
Further S. 2(101) of the CGST Act, defines securities as in S. 2(h) of the Securities Contract Regulation Act – 1956 which includes Mutual Funds as well.
Hence from the above analysis, we understand that mutual funds are a part of securities that are not taxable under GST and thereby falling under exempt supply.
What is the value on which ITC has to be reversed?
Chapter V of the CGST Rules prescribes the methodology for ITC reversal on various supplies. One such treatment shall be the ITC reversal on sale of securities.
Now at the fag end of the rules, we have an explanation which prescribes the valuation for such reversal on sale of securities. Explanation 2(b) of Chapter V of the CGST Rules, specifies that the value shall be taken as 1% of the sale value of securities.
How should the reversal be done?
For eg: Total Turnover of the Entity is Rs.10 Lakhs, and value of sale of securities is Rs.200000 and the total input tax credit id Rs.50000.
Value of exempt supply = Rs.200000 x 1% = Rs.2000
Total ITC x Value of exempt Supply = Rs.50000 x 2000 = Rs.100
Total Turnover of the entity 1000000
Hence the ITC shall not be availed and calculation for the same shall be as discussed above. The same analogy applies for shares as well.