No need to do reversal of ITC in case Zero rated supplies even if final product is nil rated supplies

As we all know that under section 17 (2) of the CGST Act, where the goods or services or both are used by the registered person partly for the purpose of effecting taxable supplies including zero rated supplies and partly for effecting exempted supplies, the amount of credit shall be restricted to so much of the input tax as it attributable to the said taxable supplies including zero rated supplies.

However, what in case of the assesse who are doing zero rated supplies of taxable as well as exempted supplies. Whether they need to do reversal of proportionate ITC under section 17(2) of the CGST Act, 2017 to the extent used in Exempted goods been exported???

Answer to these questions is “NO”!!! And the reason is not hard to find.

As we all know the inputs and input services which go in to the making of the goods or provision of service has already suffered tax and only the final product is exempted. Moreover, when the output is exempted, tax laws do not allow availment / utilization of taxes already paid on inputs or input services used for supply of the exempted output. Thus, in a true sense the entire supply is not zero rated even though the output suffers no tax, the inputs and input services have suffered tax. Since availment of credit of tax credit on input and input services to the extent used for exempted good been exported is denied. It becomes a cost for the supplier. The concept of Zero rated supplied which aims to avoid export of taxes outside India will be ruined due to this.

The definition of Zero rated Supplies as defined under section 16 of the IGST Act, 2017 is drafted so precisely to correct this anomaly.

The relevant provision as contained in section 16(1) of the IGST Act, 2017, which states that “zero rated supply” means any of the following supplies of goods or services or both, namely: –

a) Export of goods or services or both; or

b) Supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

As already seen, by zero rating it is meant that the entire value chain of the supply is exempt from tax. This means that in case of zero rating, not only is the output exempt from payment of tax, there is no bar on taking/availing credit of taxes paid on the input side for making/providing the output supply.

This is done by employing the following means as provided under Section 16 (2) & (3) of the IGST Act:

a) The taxes paid on the supplies which are zero rated are refunded;

b) The credit of inputs/ input services is allowed;

c) Wherever the supplies are exempted, or the supplies Zero Rating of Supplies in GST are made without payment of tax, the taxes paid on the inputs or input services i.e. the unutilized input tax credit is refunded.

Accordingly, as discussed above the concept of zero rating of supplies requires the supplies as well as the inputs or input services used in supplying the supplies to be free of GST.  Therefore, in case of zero rated supplies even if supplies are exempted and liable for nil rate of GST, there is no restriction on availment/ utilization of ITC of the input or input services used in such exempted supplies.

Author Bio

Qualification: CA in Practice
Company: Patel Mulchandani & Co
Location: ahmedabad, Gujarat, India
Member Since: 25 May 2021 | Total Posts: 1

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  1. Rajnikant Patel says:

    Good and beneficial article on ITC. Now a days there are many articles published on various websites with different opinions which confuse the readers. But this articles is very clear on the subject. Thanks a lot.

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June 2021