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:

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:

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:

Details of ITC for the month of March 2021:

Solution: Computation of ITC Eligible for March 2021:

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

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?

*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.

The author can be reached at jainrashi2008@gmail.com.

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.