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Reversal of Input Tax Credit under Rule 42 & 43 of CGST Rules, 2017

GST Expert
Author: CA Amlesh Gupta
Posted On: Thursday 10 May 2018

Tags: GST GSTR 3 B Rule 42 of CGST Rules Rule 43 of CGST Rules ITC GSTR 3 B Filing Reversal of ITC Reversal of GST Credit

Section 17 of CGST Act, 2017 read with Rule 42 & 43 of CGST Rules, 2017 are applicable when Input Tax Credit is claimed for the supplies which are being used for the purpose of business, for the supply of Exempt Goods or services and for the supply other than business purpose. In such case, Input Tax Credit can not be claimed fully as such corresponding expenses are incurred for supply of exempt goods or services or other than business purpose as well.

In this Article, we shall focus on the details specified under Rule 42 & 43 along with procedures to be followed to reverse Input Tax Credit.

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

As per Section 17(1) of CGST Act, 2017. Where the goods or services or both are used by the registered person partly for the purpose of business and partly for other purposes, the amount of 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, Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, 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.

This rule is basically prescribed the manner to reverse Input Tax Credit on account of common Input Tax Credit.

Rule 42 prescribes the manner to reverse such input tax credit as mentioned below:

  • 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 the 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 sub-section (5) of section 17, be denoted as ‘T3’;
  • the amount of input tax credit credited to the electronic credit ledger of 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’;
  • ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2;
  • input tax credit left after attribution of input tax credit under clause (g) shall be called common credit, be denoted as ‘C2’ and calculated as- C2 = C1- T4;
  •  the amount of input tax credit attributable towards exempt supplies, be denoted as ‘D1’ and calculated as- D1= (E÷F) × C2
  • where,

‘E’ is the aggregate value of exempt supplies during the tax period, and

‘F’ is the total turnover in the State of the registered person during the tax period.

Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated;

  • 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’, and shall be equal to five per cent. of C2; and
  • 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’, where,- C3 = C2 - (D1+D2);

Apart from the above, it is important to note explanations and deeming fictions which is mentioned in the said rule / Chapter V of Rule to determine the Aggregate Value of Exempt supplies. Below is the relevant extract for the same:

Explanation to Rule 42:

For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule;

Explanation to Rule 42 & 43:

(b) 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; and

(c) 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.

Explanation to Chapter V (i.e. Input Tax Credit): 

  • the expressions “capital goods” shall include “plant and machinery” as defined in the Explanation to section 17;
  • for determining the value of an exempt supply as referred to in sub-section (3) of section 17-
    • the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; andthe value of security shall be taken as one per cent. of the sale value of such security.
    • The definition of securities shall be the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

As per said act Securities includes Shares, Scrips, Stocks, Bonds, Debentures, Debenture stock or other marketable securities of a like nature, Derivative, Mutual funds, Government Securities, Right or interest on Securities.

Based on Explanation to Rule 42, One has to figure out the sale value of Securities and accordingly considered 1% of such sale value as Exempt Supply for the purpose of this rule.

Let us understand the Concept of Rule 42 for reversal of ITC with an example:

Sr. No.

Particulars

Formula

Amount

1

Total ITC involved in a period

T

10,00,000

 

Less:

 

 

2

ITC used exclusively for purpose other than business purpose

T1

1,00,000

3

ITC used exclusively for exempt supplies

T2

50,000

4

ITC credit not available u/s 17(5)

 

T3

75,000

5

ITC credited to Electronic ledger

C1 = T-(T1-T2-T3)

7,75,000

6

ITC exclusively used for making Taxable supplies.

T4

7,00,000

7

Balance ITC called as Common credit

C2

75,000

8

Total Turnover in a state (Incl. Exempt Sales of Rs. 49,00,000/-)

 

1,49,00,000

9

Sale Value of Shares, Bonds & Mutual funds

 

1,00,00,000

10

Aggregate amount of Exempt supplies

(49Lacs + 1% of 1,00,00,000)

E

50,00,000

11

Aggregate amount of total supplies

F

1,50,00,000

12

ITC Attributable to Exempt Supply

D1 = C2*E/F

25,000

13

ITC attributable to Non-Business purpose if common ITC used for business and non-business, shall be = 5 % of Common credit(C2)

D2

3,750

14

Total Reversal Input Tax Credit (to be added to Outwards Liability)

D1+D2

28,750

15

The remainder of the common credit shall be the eligible input tax credit

C3=C2-(D1+D2)

 

46,250

 

Such Calculation can be carried out for each tax period.  Such Input Tax Credit shall be calculated finally for the financial year before the due date for furnishing of the return for the month of September following the end of the financial year to which such credit relates.

 

where 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 in the 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 the first day of April of the succeeding financial year till the date of payment; or

 

where the aggregate of the amounts determined under sub-rule (1) in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’, such excess amount shall be claimed as credit by the registered person in his return for a month not later than the month of September following the end of the financial year to which such credit relates.

 

Rule 43 - Manner of determination of input tax credit in respect of capital goods and reversal

thereof in certain cases:

  • When Goods or services or both are used by the registered person.
  • Partly for taxable supplies including zero-rated supplies and partly for effecting exempt supplies.
  • ITC on CAPITAL GOOODS shall be restricted to amount attributable to the said taxable supplies including zero-rated supplies
  • Amount shall be calculated based on formula as prescribed under Rule 43.

Below is the illustration for better understanding

Particulars

Formula

Amount

Total  ITC on capital goods

T

10,00,000

Less :

   

ITC used exclusively for other than business purpose

T1

100,000

ITC used exclusively for exempt supplies

T2

50,000

ITC used exclusively for taxable supplies

T3

775,000

Common ITC

A= T-(T1-T2-T3)

75000

Reversal of ITC per month (5years=60 months)

Te= A/E*F /60

417

The amount Te along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.

Please feel free to write to us on amlesh@apmh.in for any further queries on the above blog.

 

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