Goods and Services Tax

Reversal of common ITC availed on inputs and input services

Goods and Services Tax – GST – By: – Shilpi Jain – Dated:- 17-12-2018 Last Replied Date:- 18-12-2018 – Credit Mechanism is the backbone of the indirect tax regime which allows the assessee to take credit of tax paid on purchase of goods and services availed, in the course of business, though with some conditions and restrictions. Credit under GST is available if used for business purpose and in proportion of its usage for making taxable supplies. Reversal of input tax credit (ITC) is required in respect of procurements that are commonly used for taxable and exempted & non-business supplies or if used for making only exempt supplies or used for non-business purposes. In this article we would like to explain the credit reversal mechanism for input and input services under various business scenarios, to see how the provision is beneficial is some cases and in some cases not so. Credit Reversal under Goods & Services Tax Section 17(2) of the CGST Act, 2017 (hereinafter referred to

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of the following year, in terms of rule 42(2) of the Rules. This can be understood with an illustration: Say ABC Ltd manufactures two varieties of footwear, one is exempt hawai slippers and the other is taxable shoes. Its turnover w.r.t exempt supplies is ₹ 1,00,000/- and taxable supplies is ₹ 2,00,000/- in a particular tax period and credit that is used commonly for both these supplies is ₹ 15,000/-. Then, ITC to be reversed = ₹ 5,000/- (i.e. 15,000 * 1,00,000 / (1,00,000+2,00,000)). Now let s discuss a few more scenarios to understand the same in detail: Scenario 1: M/s. ABC Ltd has turnover of ₹ 45 lakhs from Jul 17 to Mar 18 as below: Jul 17 to Feb 18 – only taxable turnover of ₹ 5 lakhs per month Mar 18 – taxable turnover of ₹ 3 lakhs and exempted turnover of ₹ 2 lakhs Further, total ITC during Jul 17 to Mar 18 is ₹ 4,20,000/- out of which common ITC is ₹ 20,000/- during Mar 18. Thereby, amount of ITC to be reversed for M

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– ₹ 20 lakhs Total common ITC = ₹ 32 lakhs In this case the ITC reversal for M/s. XYZ would be ₹ 23.56 lakhs [ i.e. 32 * 810/1100] However, if these 2 units were separately registered under GST then the credit reversal would be as under: Unit A = ₹ 1.2 lakhs [i.e. 12 * 10%} Unit B = ₹ 16 lakhs [i.e. 20 * 80%] Total ITC reversal = ₹ 17.20 lakhs Thereby, it can be seen that by taking separate registration, the quantum of reversal of common credits for Unit A would reduce substantially. Scenario 3: M/s. DEF Ltd is registered and engaged in providing construction services of residential complex. M/s. DEF Ltd. has sales even after obtaining OC, and if entire consideration for sale of a unit is received after OC, the same would be exempt. The following are details of the project. Year Taxable Turnover Exempted Turnover Common ITC 1 No No No 2 Yes No No 3 (OC received) Yes Yes Yes 4 No Yes No From the above it can be seen that in Year 1 there were no sales

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fter OC procurements) Year 4 – ₹ 1 Lakh The credit of Year 1, 2 & before OC credit of Year 3 i.e. ₹ 50 Lakhs would be fully eligible. Credit reversal in this case in terms of rule 42 of the Rules will be only for the credit of ₹ 2 lakhs of the Year 3. The Year 4 credit of ₹ 1 Lakh would be fully ineligible. In Year 4, any credit accumulated would be relating to exempt supplies and thereby entire credit would not be eligible. Thus, from the above it can be seen that credit reversals would have to be done on a financial year basis and that too only relating to the common credits. Further, such reversal would be required only when there is any exempted turnover in such financial year. Revisiting the credits availed earlier is not required as there is no express provision in this regard in the law. Conclusion: Thus, we can observe that even if there is unequal reversal of ITC during different months due to varied pattern of turnover, the same would be streamline

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