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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:
| Step 1 | Calculate the Total Input Tax in a tax period, which should be the total of all types of taxes paid on inward supplies and is denoted as “T”. Out of the total input tax credit (T) on inputs and input services, the ineligible credits shall be T1 + T2 + T3 and the eligible credits shall be T4 which would be as follows- |
| Step 2 | Taxes paid for supplies used exclusively for purposes other than business, denoted as “T1”. |
| Step 3 | Taxes paid for supplies used exclusively for effecting Exempted supplies, denoted as “T2” |
| Step 4 | Taxes paid for supplies on which credit is not available under Section 17(5), denoted as “T3” |
| Step 5 | Amount of ITC credited to Electronic Credit Ledger of Registered Person, denoted as “C1” i.e. C1 = T- (T1 + T2 + T3) |
| Step 6 | ITC on supplies other than Exempted but including Zero-rated supplies, denoted as “T4”. This credit is purely for business purposes and is fully eligible as ITC. |
| Step 7 | Common Input Tax Credit on inward supplies used for taxable as well as exempted outward supplies denoted as “C2” i.e. C2 = C1 – T4 |
| Step 8 | ITC attributable towards exempted supplies, denoted as “D1” i.e. D1 = (E/F) * C2 |
| Step-9 | If common ITC [C2] is used for both Business as well as Non-Business purposes then ITC attributable to Non-Business purposes shall be 5% of Common Credit and is denoted as D2 i.e. D2= C2*5% |
| Step-10 | The balance of the common credit shall be the eligible credit out of the common credit deemed as used for business purposes and is denoted as C3 i.e. C3= C2-(D1+D2) |
| Step-11 | The amounts of T1, T2, & T3 are ineligible credits. |
| Step-12 | C3 is to be computed separately for CGST, SGST, UTGST, and IGST |
| where- E = Aggregate value of Exempted Supplies during the Tax Period & F = Total Turnover in the state of the Registered person during the Tax Period |
|
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:
| Particulars | Amount (Rs.) |
| Value of taxable supply of service | 60,00,000 |
| Value of exempt supply of service | 15,00,000 |
| Value of zero-rated supply of service | 20,00,000 |
| Value of service made for personal use | 5,00,000 |
Details of ITC for the month:
| Particulars | CGST Paid (Rs.) | SGST Paid (Rs.) | IGST Paid (Rs.) |
| Total ITC available | 2,00,000 | 2,00,000 | 100000 |
| The above ITC on input service includes: | |||
| Credit on input services exclusively used for supplying exempt services | 20,000 | 20,000 | 15,000 |
| Credit on input services exclusively used for supplying taxable services (including zero-rated supplies) | 1,08,000 | 1,08,000 | 55,000 |
| Credit availed on inputs which are ineligible under section 17(5) | 20,000 | 20,000 | 8,000 |
| Credit on input service exclusively used for personal use | 18,500 | 18,500 | 5,000 |
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:
| Particulars | CGST | SGST | IGST |
| Total TC in a tax period [T] | 2,00,000 | 2,00,000 | 100000 |
| Less: | |||
| Credit on input service exclusively used for personal use [T1] | 18,500 | 18,500 | 5,000 |
| Credit on input services exclusively used for supplying exempt services [T2] | 20,000 | 20,000 | 15,000 |
| Credit availed on inputs which are ineligible under section 17(5) [T3] | 20,000 | 20,000 | 8,000 |
| Amount of ITC [C1] | |||
| C1 = T- [T1 + T2 + T3] | 141,500 | 141,500 | 72,000 |
| Less: Credit on input services exclusively used for supplying taxable services (including zero-rated) [T4] |
1,08,000 | 1,08,000 | 55,000 |
| Common credit of input and input services used for providing supply of services [C2] C2= C1-T4 |
33500 | 33500 | 17000 |
| Total inadmissible common credit as per rule 42(1) [D1+ D2] [WN-1] | 6700 | 6700 | 3400 |
| Net eligible common credit C3= C2- [D1+D2] | 26800 | 26800 | 13600 |
| Total eligible credit [T4+ C3] | 134800 | 134800 | 68600 |
| 2) Amount to be added to output tax liability [D1 + D2] |
6700 | 6700 | 3400 |
Working note 1: Calculation of the amount of ITC towards exempt supplies and supplies made for non-business use:
| Particulars | CGST (Rs.) | SGST (Rs.) | IGST (Rs.) |
| Aggregate value of exempt supply of service[E] | 15,00,000 | 15,00,000 | 15,00,000 |
| Total turnover for Jan 2023 | 1,00,00,000 | 1,00,00,000 | 1,00,00,000 |
| Credit attributable towards exempt supplies D1= [E/F] *C2 |
5025 | 5025 | 2550 |
| Credit attributable for supplies made towards non-business purposes as per clause (j) of rule 42(1) D2= C2*5% |
1675 | 1675 | 850 |
| Total inadmissible common credit as per rule 42(1) D1+D2 |
6700 | 6700 | 3400 |
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
| Only for personal use | No ITC |
| Only for exempted sales | No ITC |
| Only Normal Taxable Sales (including Zero Rated Supply) | Full ITC |
| Partly for personal / Exempted and partly for normal sales | Proportionate ITC |
