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ITC Reversal under GST | Rules 42, 43, and 44

Input Tax Credit (ITC) is the credit of GST that the taxpayer pays on the purchase of goods and services for manufacturing or selling. ITC is used by taxpayers to offset the tax liability on output supplies.

In certain conditions, if the input tax credit is wrongly claimed, then it is required to be reversed in the following months. In this blog, we will understand what is ITC reversal and how to calculate ITC reversal under Rule 42, Rule 43 and Rule 44 of the CGST Act.

What is ITC Reversal under GST?

ITC claimed by the taxpayer is required to be reversed in certain conditions despite fulfilling the basic conditions for claiming ITC. ITC reversal is required in various conditions such as the purchase of goods and services that are used for non-business purposes, blocked ITC, and so on.

For ITC Reversal, the credit of input utilized earlier is added to the output tax liability to nullify the ITC claimed earlier.

Conditions for ITC Reversal,

Here we have discussed the specific conditions under which ITC Reversal is required.

Rule 37: Reversal of input tax credit in the case of non-payment of consideration.

CGST Rule 37 specifies that in case the taxpayer fails to pay the supplier for an inward supply of goods or services for which the input tax credit has been availed, must reverse the ITC along with the interest payable thereof within 180 days from the date of the issuance of invoice.

Rule 37A: Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof.

Rule 37A states that if a taxpayer has availed input tax credit in return form GSTR 3B but the return in form GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such supplier till the 30th day of September following the end of the financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the said registered person while furnishing a return in form GSTR-3B on or before the 30th day of November following the end of such financial year.

Rule 38: Claim of credit by a banking company or a financial institution.

As per CGST Rule 38, a banking company or financial institution, including ann NBFC (non-banking financial company), engaged in the supply of services by way of accepting deposits or extending loans or advances that do not comply with the provisions of Section 17(2) shall reverse 50% of the input tax credit availed in Form GSTR 3B.

Rule 42: Manner of determination of input tax credit in respect of inputs or input services and reversal thereof.

CGST Rule 42 deals with the reversal of input tax credit on non-payment of the supplier within 180 days from the date of the invoice. The ITC reversal will be calculated on the basis of the following formula,

  • The total input tax involved on inputs and input services in a tax period, be denoted as "T",
  • The amount of input tax, out of "T", attributable to inputs and input services intended to be used exclusively for purposes other than business, be denoted as 'T1'.
  • The amount of input tax, out of "T", attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as 'T2'.
  • The amount of input tax, out of "T", in respect of inputs and input services on which credit is not available under Section 17(5), be denoted as 'T3'.

The amount of input tax credit credited to the electronic credit ledger of the registered person, be denoted as 'C1' and calculated as,

C1 = T-(T1+T2+T3)

The amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero-rated supplies, be denoted as 'T4'.

Input tax credit left after attribution of input tax credit shall be called common credit, be denoted as 'C2' and calculated as,

C2 = C1-T4

'E' is the aggregate value of exempt supplies during the tax period. 'F' is the total turnover in the State of the registered person during the tax period.

The amount of input tax credit attributable towards exempt supplies, be denoted as 'D1' and calculated as,

D1 = (E / F) x C2

The amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as 'D2'.

D2= 5% of C2

The remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting supplies other than exempted supplies but including zero-rated supplies and shall be denoted as 'C3'.

C3 = C2-(D1+D2)

Based on the above calculations, D1 and D2 are the reversible ITC.

Illustration: Consider the following scenario for the month of December 2022 in relation to supplies made in Delhi,

Total ITC available (T): 1,50,000

ITC on inputs attributable to supply used by Director/partner for personal use (T1): 7,500

ITC on inputs to be used exclusively for making exempt supply (T2): 18,000

Blocked Credits u/s 17(5) (T3): 4,000

ITC on inputs used exclusively for making taxable supplies (T4): 1,00,000

The aggregate value of exempt supplies made in December (E): 3,00,000

Total turnover in Delhi (F): 30,00,000

Solution:

C1 = T – (T1+T2+T3);
C1 = 1,50,000 – (7,500+18,000+4,000),
C1 = 1,20,500

The common credit C2 = C1–T4,
C2 = 1,20,500-1,00,000 ,
C2 = 20,500

D1 = (E÷F)×C2
D1 = (3,00,000 ÷ 30,00,000) × 20,500,
D1 = 2,050

D2 = 5% of C2,
D2 = 5% of 20,500
D2 = 1,025

C3 = C2–(D1+D2)
C3 = 20,500-(2,050+1,025)
C3 = 17,425

So, out of the originally available ITC of Rs. 1,50,000, only C3 (Rs. 17,425) and T4 (Rs. 1,00,000) were credited ultimately to the electronic credit ledger.

D1 (Rs. 2,050) and D2 (Rs. 1,025) are required to be reversed.

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

CGST Rule 43 deals with the reversal of input tax credit on inputs, input services, and capital goods on accounts of exempt supplies. The ITC reversal will be calculated on the basis of the following formula,

The input tax credit in respect of capital goods being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner,

The amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in Form GSTR 3B and shall not be credited to his electronic credit ledger.

The amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated in Form GSTR-3B and shall be credited to the electronic credit ledger.

The amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as 'A', being the amount of tax as reflected on the invoice, shall be credited directly to the electronic credit ledger and the validity of the useful life of such goods shall extend up to five years from the date of the invoice for such goods.

The aggregate of the amounts of 'A' credited to the electronic credit in respect of common capital goods whose useful life remains during the tax period, to be denoted as 'Tc', shall be the common credit in respect of such capital goods.

The amount of input tax credit attributable to a tax period on common capital goods during their useful life, be denoted as 'Tm' and calculated as,
Tm = Tc /60

  • 'E' is the aggregate value of exempt supplies, made, during the tax period.
  • 'F' is the total turnover of the registered person during the tax period.

The amount of common credit attributable towards exempted supplies, be denoted as ' Te', and calculated as,

Te = (E/F) x Tr

Thus, Te calculated above will be the ITC in respect of capital goods that are required to be reserved or added to the output tax liability.

Illustration: A company operating in Delhi had availed the following ITC on various capital goods purchased in the month of January 2023,

ITC on Machine W (used exclusively in the supply of exempt goods): 1,75,000

ITC on Machine X (used exclusively in the supply of taxable goods): 5,00,000

ITC on Machine Y (used exclusively for non-business purposes): 50,000

ITC on Machine Z (used partly in the supply of taxable and exempt goods): 4,50,000

The company also made the following type of output supplies in Delhi in the month of January:

Turnover in relation to exempt supplies: Rs. 20,00,000
Turnover in relation to taxable supplies: Rs. 80,00,000

Solution: ITC on machines W and Y will not be credited to the electronic credit ledger (1,75,000+50,000 = 2,25,000).

ITC on machine X will be credited to the electronic ledger: Rs. 5,00,000

ITC on machine Z will also be credited to the electronic credit ledger:

Tc = 4,50,000

Tm = Tc ÷ 60 = 7,500 which is also Tr in this case.

The amount of ITC to be reversed for the month of January 2023 would be,

(E ÷ F) × Tr = (20,00,000 ÷ 80,00,000) × 7,500 = 1,875

Total ITC reversed for January 2023 = Rs. 1,875

Rule 44: Manner of reversal of credit under special circumstances.

CGST Rule 44 deals with the reversal of input tax credit on non-taxable supplies.

The amount of input tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall be determined in the following manner,

  1. For inputs held in stock and inputs contained in semi-finished and finished goods held in stock, the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed by the registered taxable person on such inputs.
  2. For capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as five years.

Section 16(3)

Section 16(3) states that ITC shall not be availed if the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income tax Act, 1961 (43 of 1961). Such ITC, if availed, shall be reversed at the time of closing books of accounts for that financial year.

Section 17(5)

Section 17(5) states that ITC shall not be availed in certain cases and shall be reversed at the time of filing regular returns up to the date of filing annual returns.

Read more about Section 17(5): Click Here

Reporting ITC Reversal

The taxpayers are advised to report their ITC reversal and ineligible ITC correctly in Table 4 of GSTR-3B at the GST Portal…read more

The details of ITC reversal and ineligible ITC are also required to be furnished in Table 7 of GSTR 9.

Also Read,

GST Returns - How to File GST Returns Online?

Everything About Input Tax Credit

What is Composition Scheme under GST?

GSTR 9 and GSTR 9C Overview and Comparison

10 Common Mistakes to avoid while filing GSTR

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