The basic principal of Input Tax Credit ( ITC) under GST is the availability of credit for taxable supplies only . If some of supplies are taxable and some are exempt, the taxable person can take only proportionate input tax credit. This principle applies to input goods, input services and capital goods.
As per section 17(1) of CGST Act, Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes, the amount of input tax credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.
Where the goods and/or services are used by the registered person partly for effecting taxable supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies – section 17(2) of CGST Act
Manner of Calculation for Reversal of Input Tax Credit :- The detailed manner of calculation has been prescribed in Rule 42 of CGST Rules. Let us try to understand the manner of calculation with the following illustration:-
| Sl | Description | Symbol | Amount (Rs in Lakhs) |
| (a) | Total Input tax involved on input & input services in a tax period | T | 100 |
| (b) | Amount out of “T” attributable to Input & input services intended to be used exclusively for purposes other than business | T1 | 10 |
| (c) | Amount out of “T” attributable to Input & input services intended to be used exclusively for exempt supplies | T2 | 15 |
| (d) | Amount out of “T” in respect of inputs on which credit is not available under section 17(5) [ineligible ITC] | T3 | 05 |
| (e) | Since (a) +(b)+(c) above is exclusive for non business , exempted and eligible purposes , it will not be credited to the electronic credit ledger . Amount of ITC credited to the Electronic Credit ledger shall be T-(T1+T2+T3) = 100-(10+15+5) | C1 | 70 |
| (f) | Amount out of “T” attributable to Input & input services intended to be used exclusively for taxable supplies | T4 | 50 |
| (g) | Input tax credit left after attribution of input tax credit towards exclusives (exempted , non business , ineligible , taxable ) supplies is a Common Credit . It means common credit has a component of credit used for taxable & exempted supplies both .
T-( T1+T2+T3+T4) or (C1-T4) |
C2 | 20 |
| (h) | Aggregate value of exempt supplies ( turnover) | E | 250 |
| (i) | Total Turnover of the registered person during the tax period | F | 1000 |
| (j) | The amount of input tax credit attributable towards exempt supplies = C2*E/F = 20*250/1000 | D1 | 5 |
| (k) | The amount of credit attributable to non-business purposes included in common credit shall be equal to five per cent of C2. = 5% of C2 |
D2 | 1 |
| (l) | The remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting taxable supplies =C2-(D1+D2) | C3 | 14 |
The amount equal to ‘D1’ and ‘D2’ shall be reversed by the registered person in form GSTR-3B or through form GST DRC-03.
Invoice level identification of common credit – If the amount of input tax relating to inputs or input services which have been used partly for purposes other than business and partly for effecting exempt supplies has been identified and segregated at invoice level by the registered person, the same shall be included in ‘T1’ and ‘T2’ respectively, and the remaining amount of credit on such input or input services shall be included in ‘T4’ – proviso to Rule 42(1) of CGST and SGST Rules, 2017.
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the common credit is for example audit fees found in p/l , fixed assets of shop or HO similar item found in p/l and b/s. The same are used for business purpose and is henceforth reversed in D1. Can a stand be made that since the expenses are used in business, the same cannot be attributable as “non-business purpose” and the 5% reversal in D2 is zero?
Thank you for this illustrative explanation of credit reversal provisions for input and input services.
Please provide similar credit reversal illustrative explanation regarding capital goods if possible.
thanks and regards.
Whether ITC reversal would be required, if no ITC is availed on exempt supplies?