1. The CBIC vide Notification No. 16/2020- Central Tax dated March 23, 2020 has amended CGST Rules 43. This rule applies for ITC reversal in respect of capital goods if the said capital goods used for producing supplies partly for exempted/ non business purpose and partly for taxable / business purpose supplies.

2. Before we discuss the amendment, let us first understand the manner of calculation as per existing Rule 43 of CGST Rules.

Under GST Act 2017,the total amount of Input Tax Credit for purchase of Capital goods is eligible at the time of purchase of capital goods . However, as per Sec 17(1) and Sec 17(2) of the Act, proportionate ITC need to be reversed in case capital goods used for producing exempt or non business supplies.

Section 17(1) of CGST Act intends that ITC in respect of capital goods shall not be available to the extent these are used for non-business purposes. Similarly, section 17(2) intends that ITC in respect of capital goods shall not be available to the extent these are used for effecting exempt outward supplies.

Reversal of Input Tax Credit (ITC)

It means, the capital goods for which full ITC is available at the time of purchase shall not be used for producing exempt supplies / non business purposes. There may be three possibilities for use of such asset :-

(a) Capital goods used for producing only exempted supplies

(b) Capital goods used for producing only taxable supplies

(c) Capital goods used for producing both the taxable & exempted supplies.

Rule 43(a) (b) & (c) prescribes the manner of ITC reversal in all the three cases.

Thus, in case of (c) above,the Capital goods used for effecting both the taxable & exempt supplies. Now the proportionate amount of ITC for producing exempt supplies need to be reversed. The term ‘ proportionate amount’ is very crucial in terms of reversal of ITC and the same has been brought out in sub clause ( c) of Rule 43.

For Example, Mr A has purchased a Capital Assets for Rs 55 Lakhs on 01.07.2017. GST paid on the amount was 6,60,000/-. On 1st July 2017 itself he is eligible for ITC of Rs 6,60,000 and the same amount will be credited to his Credit Ledger.

He is supposed to use the Asset for producing taxable supplies for next 5 years / 60 months / 20 quarters ( useful life of the assets ). Rule 43 assumed life of a capital goods as 5 years.

3. Rule 43 (b) :- The amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero rated supplies shall be indicated in FORM GSTR-3B and shall be credited to the electronic credit ledger.

Example : The Asset is used exclusively for effecting taxable supplies / business purpose for the period 01st July 2017 to 30th June 2019. Out of total ITC, amount pertains for capital goods used exclusively for producing taxable supplies is as follows :-

Proportionate ITC for capital goods used for producing only taxable supplies

(i) Total ITC credited as on 01.07.2017 Rs 6, 60,000/-
(ii) Useful life of Capital goods 60 months
(iii) Period for which capital good used exclusively For producing taxable supplies 24 months
(iv) Proportionate ITC for exclusively taxable supplies [(660000/60)* 24] Rs 2,64,000/-

Since total ITC has already credited at the time of purchase, nothing is required to be done for the period it is utilized exclusively for taxable supplies.

4. Rule 43(a) : – The amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-3B and shall not be credited to his electronic credit ledger.

Example :- The capital good in example above is used exclusively for effecting exempted supplies / non business purpose for the period 01st July 2019 to 31st Dec 2019.

Proportionate ITC for capital goods used for producing only exempted supplies

(i) Total ITC credited as on 01.07.2017 Rs 6, 60,000/-
(ii) Useful life of Capital goods 60 months
(iii) Period for which capital good used exclusively For producing exempted supplies 6 months
(iv) Proportionate ITC for exclusively taxable supplies

[(660000/60)* 6]

Rs 66000/-

The amount of ITC for 6 months ie ( 11000*6) should not be credited to electronic credit ledger Since total amount has already credited Rs 11000/- per month for the period 1st July 2019 to 31st Dec 2019 need to be reversed. Total reversal during the period of exempted supplies shall be Rs 66000/-( 11000*6)

Balance ITC in credit ledger as on 31st Dec 2019 is Rs 5,94,000 (6,60,000-66000).

5. Rule 43 (c) The amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as five years from the date of the invoice for such goods:

Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger;

Proportionate ITC for capital goods used for producing partly for the taxable & partly for the exempted supplies :-

The amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’

A= Total credited -[( covered under clause (a) + covered under clause (b) )]

= 660000-(66000+264000)

= 330000

A is a common credit in credit ledger as on 31 Dec 2019 pertains to the capital goods used for both the taxable and exempted supplies. Calculation of the proportionate amount for reversal of common ITC will be in following manner :-

MMYY Total Turnover (including exempted) Exempted Turnover Proportionate ITC to be reversed Calculation
(a) (b) (c ) (d) (e)
Jan 2020 10 Lakhs 1 Lakhs Rs 550 (330000/60) * 1/10
Feb 2020 12 Lakhs 3 Lakhs Rs 1375 (330000/60) *3/12

6. Amendment in rule 43, in sub-rule (1) with effect from the 1st April, 2020 :

In the said rules, in rule 43, in sub-rule (1) with effect from the 1st April, 2020,-

(a) for clause (c), the following clause shall be substituted, namely:-

“c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A, being the amount of tax as reflected on the invoice, shall credit directly to the electronic credit ledger and the validity of the useful life of such goods shall extend upto five years from the date of the invoice for such goods:

Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, input tax in respect of such capital goods denoted as ‘A’ shall be credited to the electronic credit ledger subject to the condition that the ineligible credit attributable to the period during which such capital goods were covered by clause (a),denoted as ‘Tie‘, shall be calculated at the rate of five percentage points for every quarter or part thereof and added to the output tax liability of the tax period in which such credit is claimed:

It means, post amendment, total ITC ( including used for exclusively exempted / taxable supplies ) at the time of purchase shall be considered for calculating the amount to be reversed.

In the example above, calculation of the ITC to be reversed shall be calculated in the following manner ( w.e.f. 01 April 2020)

MMYY Total Turnover (including exempted) Exempted Turnover Proportionate ITC to be reversed Calculation
(a) (b) (c ) (d) (e)
Jan 2020 * 10 Lakhs 1 Lakhs Rs 1100/- (660000/60) * 1/10
Feb 2020 12 Lakhs 3 Lakhs Rs 2,750/- ( 660000/60) *3/12

Such reversal is required to be done by 30th June 2022 (upto 5 years from the date of the invoice for such goods). Prior to amendment reversal was required to be done for 5 years from the date asset is used for common purpose (31st Dec 2025 )

* Amendment in Rule 43 is applicable w.e.f. 01 April 2020. In order to explain in terms of examples above, The dates have been taken as Jan & Feb 2020

Author can be approached at caanitabhadra@gmail.com

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7 Comments

  1. CA KALWANI says:

    Dear Mam,
    My other concern is related with calculation of Reversal amount in case of Capital Asset whose actual useful life is 3 Years.

    As per recent changes in Rule 43 ,Sub rule(1) , Clause (C) it clarified that the validity of the useful life of such goods shall extend upto five years from the date of the invoice for such goods.

    Before Amendment, it was Fixed Useful Life of 5 Years from Invoice date.

    And as per Clause (e), amount of ITC attributable to tax period on common capital goods during their useful life, be calculated as :- Common ITC/ 60.

    But with recent Explanation added:-For the removal of doubt, it is clarified that useful life of any capital goods shall be considered as five years from the date of invoice and the said formula shall be applicable during the useful life of the said capital goods.

    So my question that, Suppose registered entity purchase capital asset whose actual useful life is 3 years only(ITC=18000).

    Reversal formula will be for each period will be Common ITC/60 = 18000/60=300.

    So as per my understanding of new explanation added in Clause(e), “Reversal to be done only for 3 years i.e. Actual Useful Life(the said formula shall be applicable during the useful life of the said capital goods). Not for total 5 Years.

    Need your valuable suggestion on same.

    1. Anita Bhadra says:

      Dear Sir
      Your understanding is right. The most important term in the amendment is UPTO 5 years from the date of the invoice for such goods.

      In case, useful life is 3 year, the reversal will be UPTO 3 years only

  2. CA KALWANI says:

    Dear Mam,
    My concern is related with calculation of useful life of Capital Goods for Common purpose Asset as specified in article above.
    As per earlier provision of rule also, Useful life was 5 Years from Invoice date only. It is clearly supported by Rule 43 sub rule (1) clause C. Also it is further Supported by proviso to clause(c) of Rule 43 (c) which specified as follow:-
    “Provided that where any capital goods earlier covered under clause (a) is subsequently covered under this clause, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger”.

    But there was no clarification in it, which lead to difference in practice of Reversal of ITC on Capital Goods.
    To cater the same Government come up with Explanation in Clause (e) of Sub Rule (1) of Rule 43 as follow:-
    “Explanation.- For the removal of doubt, it is clarified that useful life of any capital goods shall be considered as five years from the date of invoice and the said formula shall be applicable during the useful life of the said capital goods.”

  3. CMA ASIM SAHA says:

    In actual practice Do you feel that a m/c purchased by a company will expire after 5 years except intangible assets like Soft ware. Besides it is very remote that a particular m/c first used for manufacturing taxable out put and subsequently that output will be declared as exempted.

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