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REVERSAL OF INPUT TAX CREDIT UNDER GST

Free flow of Input Tax Credit (ITC) is the backbone of the GST regime because of provisions of ITC it makes GST a value-added tax i.e. the collection of tax at all points after allowing credit for inputs. ITC eliminates cascading effect and double taxation which happened in the old regime where Excise duty didn’t get set off in VAT.

The amount of tax paid on the purchase of Input Goods, Input Services, and Capital Goods and includes tax paid under Reverse charge. Then at the time of paying tax on output, tax paid on the input can be deducted, and pay the balance amount becomes output tax liability. This system is called the utilization of input tax credit. 

The benefit of ITC can be availed by the Taxpayer only when provisions regarding the following aspects are compiled- 

  • A taxpayer qualifies eligibility criteria;
  • Taxpayer complies with certain conditions while doing the transaction;
  • The taxpayer can avail the benefit of ITC only up to a certain prescribed time frame;
  • ITC under GST and Depreciation cannot be availed together over the same transaction.  

When any of these provisions do not comply and ITC availed becomes liable to be reversed. The process of reversal involves various aspects such as: 

  • Event-based reversal;
  • Computation of reversal of ITC under various rules; 
  • Reporting of reversal GSTR-3B
  • Reporting of reversal GSTR-9

1. EVENT TRIGGERING REVERSAL OF ITC

  • The recipient fails to pay the agreed consideration to the supplier (whether fully or partly) for a particular supply with 180 days of issuing the tax invoice.
  • ITC on Inputs has been used to make an exempt supply.
  • ITC on Inputs has been used for manufacturing supplies some of which were used for non-business purposes.
  • Cancellation of GST registration results in reversal of ITC.
  • Events covered in Section 17(5) blocked ITC

2. COMPUTATION OF REVERSAL OF ITC UNDER VARIOUS RULES ITC REVERSAL ON THE SUPPLIES THAT ARE EITHER EXEMPT OR USED FOR PERSONAL CONSUMPTION

A) Specific credit– ITC that can specifically be attributable and identified to supply either of the following

  • Taxable, 
  • Non-taxable or 
  • Supply consumed for personal use.

The ITC is available in the electronic credit ledger. ITC must be revered in cases of supplies which are used for non-taxable/used for personal consumption as it would be wrongly availed.

B) Common credit– ITC resulting from partly permissible supply to avail ITC and partly from prohibited supplies for availing ITC 

  • Taxable and
  • Non-taxable supplies/supplies used for personal consumption. 

The taxpayer must identify and reverse the proportionate ITC amount to the extent of supplies that are non-taxable/used for personal consumption. The remaining ITC left is eligible for the claim. The calculation differs for:

a) Inputs or input services

b) Capital goods

REVERSAL OF ITC ON INPUTS/INPUT SERVICES UNDER RULE42:

  • Businesses must first segregate the specific credits that are ineligible for the claim, from the total ITC as follows: 

T= Total ITC paid

T1= Specific credit attributable to inputs used for non-business purposes

T2= The amount of input tax attributable to inputs/input services intended to be used exclusively for effecting exempt supplies

T3= Input Tax blocked under 17(5) CGST Act, 2017

  • Reduce T1, T2, and T3 from the total ITC and derive the common credit as follows:

C1: ITC credited to electronic credit ledger 

T – (T1 + T2 + T3)

T4: Specific credit on inputs/input services attributable exclusively to making taxable supplies. This would also include zero-rated supplies like exports and supplies to Special Economic Zones.

C2: Common credit

C1–T4

 ITC on the inputs that are assumed to have been used partly in making taxable supplies and partly in making exempt supplies or used for a non-business purpose. 

  • Calculate the amount of ITC to be reversed out of the common credit as follows:

D1: The ITC attributable to exempt supplies out of common credit

(E / F) x C2

E: Value of exempt supplies  

F: Total turnover in the State of the registered person 

D2: Deemed ITC for non-business purposes out of common credit: 5% of C2

C3: Remaining eligible ITC out of common credit: C2 – (D1 + D2)

REVERSAL OF ITC ON CAPITAL GOODS UNDER RULE 43:

The very first step is to find out if the ITC falls under the following criteria:

  • The ITC is about capital goods that have been used exclusively for non-business purposes or for making exempt outward supplies. Or;
  • The ITC is about capital goods that have been used exclusively for making supplies other than exempt supplies. Note that this would include zero-rated supplies too.
  • ITC falls under category ‘A’ then credit will not be allowed in respect of the same. ITC falls under category ‘B’ then credit will be allowed and taken to Electronic Credit Ledger. 

The Capital goods’ useful life is taken as five years from the date of invoice. When Capital goods are not covered under either category, then the ITC would be called ‘common credit’ or ‘Tc’ and 5% would have to be deducted from this common credit for every quarter or part quarter for the time.  

The useful life of any capital goods is considered as 5 years and thus, ITC is divided by 60(5*12= 60).

Tm: Tc/ 60

Tr: Aggregate Tm of all those capital goods which have useful life remaining at the beginning of the tax period

Te: (E/ F) × Tr 

E: Aggregate value of exempt supplies

F: Total turnover in the State of that registered person

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. 

REVERSAL OF ITC IN CASE OF CANCELLATION OF GST REGISTRATION OR SWITCHES TO COMPOSITION SCHEME: RULE 44

This rule aims to reverse all the ITC that has been availed by a registered person if he chooses to pay tax under the composition scheme or his registration gets cancelled for any reason. 

The calculation is done as follows:

  • For inputs or semi-finished or finished goods held in stock, the ITC must be reversed. It is calculated proportionately on which credit was taken. Thus ITC will be allowed only up to the time the registered person switches to a composition scheme or on cancellation of registration.
  • In the case of capital goods, ITC computed on a pro-rata basis and useful life in months. Thus ITC for the remaining useful life of the must be reversed when the tax-payer switches from a normal scheme to a composition scheme or on cancellation of registration.

BALANCE TRANSITIONAL ITC TO BE REVERSED ON 1ST JULY 2017 FOR GOLD DORE BAR: RULE 44A

Where stock of such gold dore bar (raw material) or gold jewellery (final product) lies with the taxpayer on 1 July 2017, the ITC will be restricted to 1/6th of the credit availed in respect of the gold dore bar. Thus, 5/6th of the credit availed shall be reversed at the time of supply is made. 

REPORTING OF ITC REVERSAL IN GSTR-3B 

The ITC reversed that needs to be reported in the following manner- 

  • As per CGST/SGST Rules, where the ITC attributable to exempt or non-business supply is required to be calculated using the formula mentioned earlier and is entered in the form. It will not auto-populated; and
  • Where ITC reversal due to other circumstances will have to be reported;

3. REPORTING OF ITC REVERSAL IN GSTR-9

The annual return will also need to be filled up with details regarding ITC reversed for the whole year. Wherever possible, the details will be auto-filled based on the data entered in the monthly Form GSTR 3B but changes can be made by the taxpayer wherever required. 

For this purpose you can contact the best GST Consultant of your Area.

Conclusion

Hope the blog was self-speaking and easy to understand. The purpose of GST is circumstances in which the credit is barred and availed credit has to be reversed as discussed above. Seamless flow of credit to avoid double taxation. However, there are certain circumstances in which the credit is barred and availed credit have to be reversed as discussed above. 

Pankaj Guptahttps://pgaca.in/
Pankaj is a Chartered Accountant by profession and an expert in the field of GST and Taxation with over 12 years of working experience. He is an expert business consultant and tax expert which helps the business to grow effectively and organically. Being the lead partner, he has been leading the firm and managing the clients across geographies.

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