There are certain instances in the GST Act where the Reversal of ITC taken while filing GST Returns is required. A Tax payer is required to reverse excess ITC taken or ITC wrongly availed while filing the GST Returns.
One such incidence where ITC is required to be reversed is given under Rule 42 and 43 of the CGST Act, 2017.
As per Rule 42 and 43 of the CGST Act, 2017, ITC on Inputs/Input services or Capital Goods used to make taxable as well as non-taxable/exempt supply or for manufacturing supplies some of which were used for non-business or personal purposes is determined and required to be reversed.
Before we proceed to see the formula to determine ITC to be reversed under Rules 42 and 43, we need to understand a few terms relating to ITC.
Total ITC can be segregated into following types of ITC:
Specific Credit: ITC that can be specifically attributable to a supply either taxable or non-taxable, or for supply consumed for personal use or non-business use. This ITC is easily identifiable to a particular supply.
Common Credit: ITC amount that cannot be attributable to a specific supply but is used partly for making taxable supply and partly for non-taxable supply or partly used for personal consumption.
Rules 42 and 43 provide the method for determining the ITC to be reversed which is partly used for making taxable and partly for non-taxable or non-business/ personal purposes.
Therefore, if you are a supplier supplying taxable as well as exempt services/non-taxable services then you need to determine common credit used for making both taxable as well as non-taxable services and reverse the same on the basis of the formula given under Rules 42 and 43 of the CGST Rules.
Rule 42 talks about determining common credit of ITC on goods and services and Rule 43 talks about determining common credit of ITC on Capital Goods and the amounts to be reversed of both.
Ans: As per Section 17(2) of the CGST Act’2017, Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
Therefore, as per section 17(2) of the CGST Act’2017, the amount of ITC shall be restricted to the amount of ITC that can be attributable directly or indirectly to the taxable supplies including zero rated supplies i.e exports.
Therefore, the ITC directly attributable to exempt and Non-taxable supply shall be reversed if wrongly taken. Also, ITC directly attributable to non-business or personal purposes shall be reversed if wrongly availed.
Since the amount of ITC as per section 17(2) is restricted to the amount of ITC attributable to the taxable supplies including zero-rated supplies therefore in case of common credits which are used for both taxable as well as non-taxable/exempt supplies proportionate ITC amount to the extent of supplies that are non-taxable/used for personal consumption shall be identified and reversed as per Rules 42 and 43.
Ans: The reversal proportionate ITC to be reversed under Rule 42 is to be determined as
a) The total input tax (ITC) involved on inputs and input services in a tax period classified as ‘T’;
(b) the amount of input tax, out of ‘T’, attributable to inputs and input services intended used exclusively for the purposes other than business, classified as ‘T1’;
(c) the amount of input tax, out of ‘T’, attributable to inputs and input services used exclusively for effecting exempt supplies, classified as ‘T2’;
(d) the amount of input tax, out of ‘T’, in respect of inputs and input services on which credit is not available under sub-section (5) of section 17 i.e blocked credit, classified as ‘T3’;
(e) the amount of input tax credit credited to the electronic credit ledger of the registered person, shall be classified as ‘C1’ and calculated as C1 = T- (T1+T2+T3);
(f) the amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted i.e taxable supplies including zero rated supplies, be denoted as ‘T4’;
(g) input tax credit left after attribution of input tax credit under clause (f) shall be called common credit and be denoted as ‘C2’ and calculated as
C2 = C1- T4;
(h) the amount of input tax credit attributable towards exempt supplies, be denoted as ‘D1’ and calculated as
D1= (E÷F) × C2
where, ‘E’ is the aggregate value of exempt supplies during the tax period, and ‘F’ is the total turnover in the State of the registered person during the tax period:
Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated;
Also, deemed ITC attributable for non-business purposes out of common credit will be 5% of C2
Therefore, D2 = 5% OF C2
D1 and D2 will be the credit that will be required to be reversed under Rule 42 out of the common credit.
Hence, we can also infer that out of the common credit, the remaining eligible credit will be:
This will be the common credit available as ITC.
Therefore, to summarize, first of all we separate the Input not available for credit from the total input like blocked credits, ITC attributable to exempt supplies and ITC from non-business purposes.
The net input available after deducting the above inputs is the input available in the Credit Ledger. Now this net ITC available in the credit leger after deducting the ITC not available consists of ITC directly or indirectly attributable to Taxable supplies plus ITC indirectly attributable to non-taxable supplies.
Since the ITC consists of ITC directly or indirectly attributable to Taxable supplies plus ITC indirectly attributable to non-taxable supplies therefore now we separate the ITC Directly attributable to Taxable supplies from this ITC.
The net ITC is the ITC indirectly attributable to Taxable and Non-Taxable/Exempt supplies. This Net ITC is the common credit which is indirectly related to both taxable and non-taxable supplies and out of this net ITC some amount is to be reversed being related to non-taxable/exempt supplies which is as per the formula given above under Rule 42.
Let’s see an example of the above Rule and the reversal thereof:
Consider the following situation for the month of January 2023 relating to supplies made in Delhi:
Total ITC available (T) 15,00,000/-
ITC on inputs attributable to supply used by Director/partner for personal use (T1) – 7500
ITC on inputs to be used exclusively for making exempt supply (T2) – 15,000
Blocked credits under Section 17(5) is (T3)- 77,500
ITC on inputs used exclusively for making taxable supplies (T4) – 2,50,000
The aggregate value of exempt supplies made in January’2013 (E) – 3,00,000
Total turnover in Delhi (F)- 30,00,000
C1 = T – (T1+T2+T3);
C1 = 15,00,000 – (7,500+15,000+77,500), therefore, C1 = 14,00,000/-
This C1 is the ITC credited to the electronic credit Ledger.
Now to calculate the common credit we use C2 = C1 – T4,
C2 = 14,00,000 -2,50,000 i.e., C2 = 11,50,000/-.
Now out of this common credit we calculate the ITC to be reversed i.e
D1 = (E÷F) × C2, i.e., D1 = (3,00,000 ÷ 30,00,000) × 11,50,000 i.e., D1 = 1,15,000/-
D2 = 5% of C2, i.e., D2 =5% of 11,50,000 i.e 57,500/-.
C3 = C2 – (D1 + D2)
C3 = 11,50,000 – (1,15,000+57500) = Rs. 9,77,500/-
Hence, out of the originally available ITC of Rs. 15,00,000, D1 (Rs. 1,15,000) and D2 (Rs. 57,500) were required to be reversed under Rule 42 and C3 and T4 will be will be available as credit in the credit ledger.
The rest of the credit of 1,00,000/- i.e (T1+T2+T3) is not available and not credited to the electronic credit ledger. However, if the same has been credited to Credit ledger, then the same needs to be reversed also.
(The author is a Chartered Accountant and can be contacted at firstname.lastname@example.org or email@example.com or Mobile: +91-9953199493)