Reverse Common Input Tax Credit before filing GSTR9

Common credit means that part of ITC which cannot be identified specifically to taxable supplies including zero rated or exempt supplies or non- business rather commonly used for taxable supplies, exempt supplies or/and for non-business use.

For Input goods and services: Rule 42 of the CGST Rules 2017 prescribe the ITC reversal on the supplies that are exempt or used for personal consumption.

As per Rule 42, reversal is required for that portion of common credit which is attributable to exempt supplies or for non-business use.

This reversal needs to be done at the time of filing GSTR3B, every month/quarter, as the case may be.

A formula has been prescribed to determine the eligible ITC to be taken removing the ITC attributable to exempt supplies or used for non-business use.

For using that formula, we need to first work out 3 things i.e. common credit (C2), common credit attributable to exempt supplies (D1), common credit attributable to non-business use (D2).

Let us understand this in steps:

Step 1 : Compute Common credit:

Total ITC for the period	T
Less: ITC for inputs and input services used exclusively for non-business purposes	(T1)
Less: ITC for inputs and input services used exclusively for exempt supplies	(T2)
Less: ITC for inputs and input services which are ineligible for credit(Blocked credit u/s 17(5))	(T3)
ITC Credited to Electronic credit ledger	C1
Less: ITC for inputs and input services used exclusively for taxable supplies including zero rated supplies	(T4)
Common ITC available for apportionment	C2

Step 2 : Compute ITC attributable to exempt supplies by apportionment of common credit:

• ITC attributable to exempt supplies(D1)=

Aggregate value of exempt supplies*Common credit(C2)
Total turnover of GSTN during tax period

• ITC attributable to non-business supplies(D2) = 5% of C2

Step 3: Compute Eligible credits:

The remainder of the common credit shall be the eligible ITC attributed to the purposes of business and for effecting supplies other than exempt supplies and shall be denoted by C3, where:-

C3 = C2-(D1+D2)

Now let us delve into what “exempt supplies” actually mean:

Exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax u/s 11 or, u/s 6 of the IGST Act, and includes non-taxable supply(Section 2(47)). Following is a non-exhaustive list showing some of the inclusions/exclusions from exempt supply for the purpose of calculation of common credit:

Inclusions in Exempt supplies/turnover (Section 17(3))

a.  Supplies on which recipient in liable to pay tax- This is for GTA, Legal consultants etc who has to include this value to arrive at exempt supplies.

b. Transactions in Securities/Mutual funds – Value taken is 1% of the sale value of such security.

c. Sale of Land- Value of such exempt supply is the value adopted for paying stamp duty.

d. Sale of building- If the same is not subject to GST as per Para 5(b) to Schedule II to CGST Act. Sale of building subject to GST only when any amount received by builder before issuance of completion certificate.

e. Any Nil rated supply(Not zero rated/export supply) f. Any other exemption vide Notifications Example: MEIS License sale

Exclusions in Exempt supplies/turnover (Explanation 1 to Rule 43)

a. the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances.

Example: Interest received on investment in bank fixed deposit, Interest received on saving deposit shall not be included while calculating exempt turnover.

b. the value of supply of services by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India.

c. Value of supply shall not include Schedule III activities (i.e activities which are neither a supply of goods nor supply of services) except sale of land/building

d. Export/zero rated supplies/supplies of goods or services to SEZ Unit/Developer.

e. Dividend income/Profit distribution to partners is covered under the definition of Money and transaction in Money is not covered under GST, thus it is a non-supply.

♦ Illustration for better understanding:

Case: Bxe Ltd. provides taxable as well as exempt services. Turnover of it for the month of March 2021 is as under:

Particulars	Amt(Rs.)
Value of Nil rated supplies	10,00,000.00
Value of taxable supplies	30,00,000.00
Value of Zero rated taxable supplies	8,00,000.00
MEIS License fee sale	5,00,000.00
Interest on Bank Fixed Deposit	2,00,000.00
Value of supplies for personal use	5,00,000.00
Total	60,00,000.00

Details of ITC for the month of March 2021:

Particulars	CGST	SGST	IGST
Total ITC	1,08,000	1,08,000	54,000
The above input includes the following:
i. ITC exclusively used for supplying exempt services	18,000	18,000	7200
ii.  ITC exclusively used for supplying zero rated services	54,000	54,000	3600
iii.  ITC on inputs which are not eligible u/s 17(5)	18,000	18,000	6300
iv. ITC exclusively used for supplying personal use services	10,800	10,800	5400

Solution: Computation of ITC Eligible for March 2021:

Particulars	CGST	SGST	IGST
Total ITC(T)	1,08,000	1,08,000	54,000
Less:
i. ITC exclusively used for supplying exempt services(T2)	(18,000)	(18,000)	(7200)
ii. ITC on inputs which are not eligible u/s 17(5)(T3)	(18,000)	(18,000)	(6300)
iii. ITC exclusively used for supplying personal use services(T1)	(10,800)	(10,800)	(5400)
ITC Credited to Electronic credit ledger(C1)	61,200	61,200	35,100
Less: ITC for inputs and input services used exclusively for taxable supplies including zero rated supplies(T4)	(54,000)	(54,000)	(3600)
Common ITC available for apportionment(C2)	7,200	7,200	31,500
Total Inadmissible credit as per Rule 42(1){D1+D2}(Refer Working Note)	2160	2160	9450
Net eligible common credit C3 = C2-{D1+D2}	5040	5040	22,050
Total credit eligible(T4+C3)	59,040	59,040	25,650

Working Note: Calculation of ITC towards Exempt supplies and supply made for Non business use:-

Particulars	CGST	SGST	IGST
Value of Nil rated supplies	10,00,000.00	10,00,000.00	10,00,000.00
MEIS License fee sale	5,00,000.00	5,00,000.00	5,00,000.00
Aggregate value of exempted supply of services(E)	15,00,000.00	15,00,000.00	15,00,000.00
Total turnover(F)	60,00,000.00	60,00,000.00	60,00,000.00
Credit attributable towards exempt supplies D1= (E/F)*C2	1800.00	1800.00	7875.00
Credit attributable for supplies made for non-business purpose (D2 = 5%*C2)	360.00	360.00	1575.00
Total Inadmissible credit as per Rule 42(1)	2160.00	2160.00	9450.00

For Capital goods: Rule 43: Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.

Determination of common credit as per Rule 43(1)(c) and 43(1)(d) – Where the capital goods were initially used for effecting either taxable/exempt supplies and then are being used for common purposes, the ITC has to be reduced by 5% per quarter or part thereof from the date of invoice.

• What is treated as common credit in case of capital goods?

Particulars
ITC of Capital goods used for both taxable and exempt supplies	xxx
ITC of Capital goods use changed from exclusively exempt to common use- Owing to change in use from exclusively exempt to common use	xxx
ITC of Capital goods use changed from exclusively taxable to common use	xxx
Total common credit(Tc)	xxx
Common credit  ÷ 60*(Tm)	xxx
Common credit attributable to exempt supplies	Aggregate value of exempt supplies × Common credit   Total turnover

*It was clarified vide Notification No. 16/2020- Central Tax dated March 23, 2020 that w.e.f 01 April 2020 , the 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.”.

Interest in case of reversal of ITC:

As per the wordings of Rule 43, “the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts determined under sub-rule (1) in respect of ‘D1’ and ‘D2’, such excess shall be added to the output tax liability of the registered person for a month not later than the month of September following the end of the financial year to which such credit relates and the said person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from first day of April of the succeeding financial year till the date of payment”;

Analysis of the above: In case of any reversals, Interest as per Section 50 shall be leviable from the first day of April of the the succeeding financial year till the date of payment, in case the above provisions have not been applied and reversal has not been done in any month, (Rate of interest being 24% in case of excess ITC Reversal).

Conclusion: Thus to avoid any future hassles, reverse the common credit if not already done so.

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DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.