Reversal of ITC - Rule 42 of CGST Rules

What does the Reversal of Input Tax Credit mean?

In certain situations, even if the basic conditions for claiming ITC are fulfilled, the claims for ITC should be reversed. Depending on when such reversal is undertaken, interest payments may also be required.

Here are some examples in the Goods and Services Tax (GST) Act where reversing Input Tax Credit (ITC) is necessary when filing GST returns. It is essential to reverse additional ITC taken or ITC wrongly taken during the process of filing GST returns.

An instance where the reversal of Input Tax Credit is necessary is outlined under Rule 42 of the Central Goods and Services Tax (CGST) Act, 2017. Under Rules 42 of the CGST Act 2017, ITC in relation to inputs or input services is attracted by the provisions of sub-section (1) or sub-section (2) of Section 17.

As per Section 17(1) of CGST Act 2017, Credit admissibility if goods and/or services are used for providing both business as well as non-business purposes:

Goods or Services or both used partly for business and partly for other purposes, credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

As per Section 17(2) of CGST Act 2017, Credit admissibility if goods and/or services are used for providing both taxable as well as exempted supplies:

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
  Credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.So, As per ITC Reversal Rule, Rule 42 of CGST Act, Input Tax Credit applied to inputs, and input services used for both taxable and non-taxable/exempt supplies or for manufacturing, where some of the supplies were utilized for non-business or personal purposes must be assessed and subsequently reversed.

The total Input Tax Credit (ITC) can be apportioned among the following types of ITC:

Specific Credit: Input Tax Credit (ITC) can be attributable specifically to supplies that are taxable or non-taxable or for supplies utilized for personal or non-business purposes. This ITC can be easily identified for a particular supply.

Common Credit: The amount of Input Tax Credit (ITC) that cannot be exclusively attributed to a specific supply but is used partially for making taxable supplies and partially for non-taxable supplies or partially for personal consumption can be referred to as common ITC.

Rules 42 and 43 provide a method for determining the reversal of Input Tax Credit (ITC), which is used partially for making taxable supplies and partially for non-taxable supplies or for personal/non-business purposes.

Therefore, if you are a supplier dealing with both taxable and exempt services/non-taxable services, you are required to determine and reverse the common credit used for both taxable and non-taxable services based on the formula provided as per CGST Rules, Rules 42 and 43.

Rule 42 pertains to determining the common credit of Input Tax Credit (ITC) on goods and services, while Rule 43 discusses determining the common credit of ITC on capital goods and reversing the amount attributable to both.

The determination method for the reversal of Input Tax Credit as specified in Rules 42 and 43 of the Central Goods and Services Tax Rules, 2017

The amount of Input Tax Credit (ITC) that needs to be reversed is calculated by multiplying the ratio of the turnover of exempted supplies by the total turnover of the common Input Tax Credit.

Additionally, in the case of "real estate services," the Input Tax Credit (ITC) that needs to be reversed is calculated by multiplying the ratio of the carpet area of the exempted area to the total carpet area by the common Input Tax Credit.

Rule 42: Calculation of Input Tax Credit for Input & Input Services and its reversal in normal cases (i.e. excluding real estate services):

If a taxpayer is involved in supplying both taxable and non-taxable supplies, the calculation for eligible Input Tax Credit will be as follows:

Remarks:

• If the calculated amount exceeds the provisional calculation, the additional amount should be added to the output tax liability.
• Interest is to be paid from the month of April of the next financial year until the date of payment.

EXAMPLE:

Alfa Ltd. is a company providing taxable as well as exempted services. Turnover of Alfa Ltd. for the period of January 2023 is as under:

Details of ITC for the month:

CALCULATE:

• Entitlement of ITC of A Ltd. For the month of January 2023 under rule 42 of CGST rules.
• The amount to be added to the output tax liability of A Ltd

Answer

Computation of ITC eligible for tax period January 2023:

Working note 1: Calculation of the amount of ITC towards exempt supplies and supplies made for non-business use:

Need for Reversal of ITC under Rules 42/43 of CGST Act, 2017

As per Section 17 (1) & (2) of the CGST Act, 2017, Where the goods or services or both are used by the registered person partly for taxable supplies including zero-rated supplies, and partly for exempt supplies and used non-business or personal purposes, 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 Rule 42 of the CGST Act, 2017, 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.

FAQ (Frequently Asked Question) on Input Tax Credit (ITC) Reversal :-

Q. What is ITC reversal?
A. According to Rule 42 of the CGST Act, 2017, 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.

Q. What is Rule 42 of CGST Rules?
A.Rule 42 is related to the reversal of ITC when inputs are used for taxable/ non-taxable, exempt supplies/personal supply and the reversal of ITC according to the supply type.

Q. What does Rule 43 of CGST Rules entail?
A. Rule 43 of CGST Rules is related to the reversal of ITC in the case of capital goods when capital goods are used for taxable/ non-taxable, exempt supplies/personal supply.

Q. Is there a time limit for ITC reversal in case of non-payment to the supplier?
A. Yes, there is a provision for the reversal of ITC, if the payment is not made within 180 days.

Q. ITC reversal on the sale of capital goods?
A. As per Section 18(6)of CGST, In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:

Q. What is ITC Full form?
A. ITC stands for Input Tax Credit.

Q. In case of delay, is there any interest on the reversal of ITC?
A. Yes, there will be applicability of interest in case of delay in reversal of ITC

Q. Concept of blocked ITC in GST?
A.Section-17 (5) refers to the cases of Blocked ITC in certain cases, where input tax credit is not allowed i.e. certain categories of goods and services on which input tax credit cannot be claimed.

Q. Eligibility of ITC on capital goods?
A. If the capital goods are being used for business purposes or are to be used for business purposes, then input tax credit of GST paid can be claimed. Along with this, if only exempted supply is being done using that capital goods, then in that case ITC will not be available on capital goods.

ITC on Capital Goods

Disclaimer:-The information available on this website/ App is solely for informational purposes. We make no representation or warranties of any kind, express or implied about the accuracy, reliability, with respect to information and material or video available on website/APP, any reliance you place on such information is therefore strictly at your own risk. We are not liable for any consequence of any action taken by you relying on the material/information provided on this website.