Mansi Goel
Under GST Law, there are various activities which need to be completed by 30.09.2019 in respect of the supplies made during the FY 18-19. One of such activities is the finalization of the common credit reversed during the year.
The manner of reversal of credit is prescribed under Rule 42 (for inputs and input services) and Rule 43 (for capital goods) of CGST Rules, 2017.
Rule 43 does not contain the requirement of finalization of the credit reversed during the year. Hence, in this article, we shall be discussing the provisions of Rule 42 which prescribes the manner of reversal of credit availed on inputs and input services.
Rule 42 prescribes a formula for computing the amount of credit attributable to exempted supply. Broadly, as per the said Rule, in respect of the inputs and input services which are used exclusively for making the exempted supplies, credit is not available.
There may be certain inputs/input services which are used for making taxable as well as exempted supplies. As per Rule 42(1), the following amount of credit shall be treated as attributable to the exempted supplies and hence, the same is required to be reversed out of the total credit availed during the month:
Common credit attributable to exempt supplies (“D1”): Amount of common credit availed during the month X (Value of exempt supply during the month/Total turnover in the State during the month)
The above computation is required to be done for each month in which the exempt supply is made.
Having reversed the common credit on monthly basis during the year, the next step is to finalise such credit after the financial year end.
As per Rule 42(2) of CGST Rules, the amount of common credit reversed on monthly basis during the year is required to be calculated finally for the financial year before filing GSTR 3B of the month of September of the following financial year. Thus, in respect of the common credit reversed during the FY 18-19, the finalization should be done by 30.09.2019.
In this regard, Rule 42(2) states as follows:
- where the aggregate of the amounts calculated finallyin respect of ‘D1’ exceeds the aggregate of the amounts determined on monthly basis for ‘D1’, such excess shall be reversed by 30.09.2019. (D1 is the amount of common credit attributable to exempt supplies)
Along with the reversal of credit, interest is also required to be paid for the period starting from 01.04.2019 till the date of reversal.
- where the aggregate of the amounts calculated finallyin respect of ‘D1’ is lesser than the aggregate of the amounts determined on monthly basis for ‘D1’, the differential amount can be claimed as credit by 30.09.2019.
For the purpose of Rule 42(2), the amount of credit attributable to exempt supply is required to be calculated finally. However, the method to calculate such final amount is not prescribed by the Rule.
In order to understand the issue, let us take an example. Suppose, a business division was transferred by an assessee in June 2018. The said transfer of business division is considered as an exempted supply. For the month of June 2018, following are the relevant details:
(a) Amount of credit availed on inputs and input services: Rs. 1,00,000/-
(b) Value of exempted supply: Rs. 6,00,000/-
(c) Total turnover in the State: Rs. 10,00,000/-
For the month of June 2018, the amount of credit attributable to exempted supply would be Rs. 60,000/- (a*b/c). The said credit would be required to be reversed while fling GSTR-3B of June 2018.
Now, the issue arises with respect to the manner of finalization of this credit of Rs. 60,000/- which was attributable to exempted supply.
On perusal of Rule 42(2), a doubt arises that how should the amount of Rs. 60,000/- be calculated finally. The said figure was calculated based on the figures of June 2018 when the exempted supply was made. For the purpose of final calculation, whether the figures of June 2018 only should be considered or the figures for entire financial year are required to be considered.
In case the figures of June 2018 only are considered for the purpose of finalization, the final amount and the original amount calculated during the said month would always be same. There would not be any difference between the said amounts. This will render the provision of Rule 42(2) redundant as it will not have applicability in any case.
The second possible view is that the finalization should be done considering the figures of entire financial year. To understand, say, during the FY 18-19, the total amount of credit availed was Rs.15,00,000/- and the total turnover in the State was Rs. 50,00,000/-. There was only one exempted supply of Rs. 6,00,000/- made during June 2018. Now, a view may be taken that for calculating the final amount of credit attributable to exempt supply, the amount of credit and total turnover should be considered for the full financial year. Hence, the final amount of credit attributable to exempt supply would be Rs. 1,80,000/- (15,00,000*6,00,000/50,00,000). However, if such a view is adopted, then, for the exempted supply made in June 2018, a portion of the credit availed in the entire year, which was not even attributable to the exempted supply will also get reversed at the time of finalization. This will defy the scheme of input tax credit.
These are some of the possible methods for finalization of credit. Apart from these, any other method can also be argued to be applicable.
However, in the absence of a formula prescribed in the law itself, any method adopted by the assessee will invite disputes.
Considering that the last date for finalization of such credit is near, it is high time that the Government issues necessary clarifications in this regard prescribing the manner of finalization of reversed credit so as to avoid potential disputes.
