Reversal of Input Tax Credit in GST Returns – Detailed Analysis and Methodology

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Reversal of Input Tax Credit in GST Returns – Detailed Analysis and Methodology
 

Input tax credit has been sparkling conversations among taxpayers and tax experts. There have been constant changes in the provisions relating to ITC. The government has been tightening the regulations relating to ITC claims in a bid to tap fraudulent claims of ITC. There are many instances where the taxpayers are required to reverse their ITC under GST. Therefore, it is important for the taxpayers as well as tax experts to know when a situation for reversal of ITC under GST can arise and how to do the same. Most people wonder how to do reversal of ITC in GST.
In this guide, you will get to know about ITC reversal under rule 42 & 43 as well as how to reverse excess ITC claimed in GSTR-3B.

Situations for Reversal of Input Tax Credit

  • Following are the situations that may warrant the reversal of input tax credit under GST by the taxpayers:

Reversal of ITC on Input Supplies Used for Exempt Supplies or Non-Business Purpose – Rule 42
Rule 42 of CGST Rules governs those cases where the input supplies (other than capital goods) are wholly or partly used for purposes other than business as well as those cases where the input supplies are used to provide wholly or partly exempt supplies. In either case, Rule 42 lays down the methodology to be followed for calculating the amount of credit to be reversed. Let’s understand in detail the methodology as laid down by Rule 42.
 

Step-1: Calculate the common credit.

Common credit can be calculated as follows:

Particulars

Amount

Total ITC involved in input supply of goods and services

XXX

Less

ITC on inward supply of goods and services that will be used exclusively for non-business purposes

XXX

ITC on inward supply of goods and services that will be used exclusively for providing exempt supplies

XXX

ITC on inward supply of goods and services that are ineligible for credit [Blocked ITC as per Section 17(5)]

XXX

Total ITC to be credited to Electronic Credit Ledger

XXX

Less

ITC on inward supply of goods and services that will be used exclusively for providing taxable supplies including zero-rated supplies

XXX

Common ITC [C1]

XXX

 

Common ITC is that portion of the ITC on inward supplies of goods or services that are used for providing taxable and exempt supplies as well as supplies for non-business purposes.

Step-2: Calculate common credit to be attributed to exempt supplies

Now, the common credit shall be apportioned to that used for exempt supplies by using a simple formula:

  • C2 = E/T * C1
    Where,
  • C2 = Credit attributable to the exempt supplies
  • E = Aggregate value of exempt supplies made during the tax period
  • T = Total turnover in the state during the tax period
  • C1 = Common ITC

     

Step-3: Calculate common credit to be attributed to non-business purposes
Now, the common credit shall be apportioned to that used for non-business purposes. This can be calculated as follows:
C3 = C1 * 5%
Where, C3 = is the common credit attributed to non-business purposes
A flat rate of 5% has been prescribed to attribute ITC to that used for non-business supplies.

Step-4: Compute eligible ITC and restrict the remaining ITC
The last step involves calculating the ITC attributed for providing taxable supply including the zero-rated supply. This includes:

C4 = C1 – (C2 + C3)
Where, C4 is the common credit attributed for providing taxable supply including the zero-rated supply. The remaining ITC i.e., C2+C3 shall be reversed.

Reversal of ITC on Capital Goods Used for Exempt Supplies or Non-Business Purpose
Rule 43 of the CGST Rules is akin to Rule 42. However, Rule 43 governs the reversal of ITC on capital goods used for providing exempt supplies or for a non-business purpose. Following is the methodology for using calculating ITC to be reversed on capital goods:

Step-1: Calculate common credit

Taxpayers need to calculate the common credit i.e., credit used for providing taxable and exempt supplies as well as used for a non-business purpose. The following points merit consideration in this regard:

  • ITC on capital goods used exclusively for non-business purposes or providing exempt supplies will not be credited to the electronic credit ledger. However, those used for exclusively providing taxable as well as zero-rated supplies will be credited to the electronic credit ledger.
  • The remaining capital goods (not covered in the above two points) shall be denoted as ‘A’. These are the capital goods that are used for common purposes i.e., for providing taxable as well as exempt supplies and for non-business purposes as well. This amount will be credited to the electronic credit ledger and the useful life of such capital goods should be considered as 5 years from the date of invoice.
  • For capital goods that were earlier used exclusively for non-business purposes or providing exempt supplies and are now used for common purposes, the ITC for such capital goods should be credited to the electronic credit ledger. They should also be denoted as ‘A’ (same as above). Then, ineligible ITC shall be computed by determining the period for which the capital goods were used for exclusively non-business purpose or providing exempt supplies and calculating ineligible ITC @ 5% per quarter or part thereof. Denote the same as ‘Tie’. It shall be added to the output tax liability for the tax period in which the ITC on such capital goods is claimed.
  • The total amount to be credited to the electronic credit ledger is ‘A’ i.e., point iii + point iv above. The total amount of ‘A’ is the common credit of capital goods that are used for providing taxable as well as exempt supplies and non-business purpose.
  • Capital goods that were exclusively used for providing taxable supplies, including zero-rated supplies and are now used for a common purpose, then the ITC shall be added to the common credit.

Step-2: Calculate common credit for each month of the useful life

As stated above, the useful life of the capital goods used for the common purpose shall be taken as 5 years from the date of invoice i.e., 60 months. The credit for each month shall be calculated as follows:
Tm = Tc / 60 months
Where,

  • Tm = common credit for each month
  • Tc = total common credit

Step-3: Calculate the common credit used for exempt supplies

Common credit used for providing exempt supplies shall be calculated as follows:
Te = Tm * (E/F)
Where,

  • Te = ITC on capital goods used for providing exempt supplies
  • E = Aggregate value of exempt supplies provided during the tax period
  • F = Total turnover in the state during the tax period

‘Te’ shall be added to the output tax liability for each tax period.

Reversal of ITC for Failure to Make Payment by the Recipient

As per the second proviso to Section 16(2), if a recipient fails to make the payment to the supplier within 180 days from the date of issue of invoice by the supplier, then the ITC claimed by the recipient of supply shall be reversed by adding it to the output tax liability along with the applicable interest. 

Credit Note Issued to ISD

A credit note issued to the Input Service Distributor (ISD) will lead to the reversal of ITC by the ISD. Further, as the ISD further distributes the credit to the taxpayers, all such taxpayers who have claimed ITC shall be required to reverse their ITC based on the credit note issued by the ISD to such taxpayers.
The amount to be reversed as ITC shall be added to the output tax liability of the taxpayers reversing the ITC. 

Wrong Availment of ITC Under GST

There might arise an error while filing GSTR-3B whereby you might end up claiming incorrect ITC. If you have claimed excess ITC than that permissible to you, then you will have to reverse the same while filing the GST return for the tax period in which you discover the error. You can also correct your error while filing the annual return. However, you will have to pay interest on reversal of ITC under GST that you inadvertently claimed.

Changes in the Earlier Returns

If there is a change in earlier returns and your supplier issues a credit note, then you will have to reverse the ITC in your GST returns for the period in which the credit note is issued. This can be due to the mistake in filing GST returns by the supplier, return of products by you due to any reason etc.

In a Nutshell
Whenever a situation of GST ITC reversal arises, then it not only reduces your ITC but can also lead to the payment of interest. Under GST, interest payments can only be made in cash and cannot be paid through the utilisation of ITC. Therefore, it is important to always know the rules and provisions for claiming ITC. In case you have any queries regarding the claim and reversal of ITC under GST, then contact your eAuditors now.



 


 


Author : Dipen

Date     : 13-Jul-2022


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