GSTplus HelpCenter

REVERSAL OF INPUT TAX CREDIT IN GST

Input Tax credit (ITC) is one of the base on which the building of GST is placed. The reason for saying so is out of many issues, one of the major issue is cascading effect that is Tax on Tax and therefore GST was proposed with the intention of having seamless flow of credit. So the provisions of ITC have to be understood and digested completely.

In GST, you can avail the benefit of taxes paid on purchases (inputs) against the taxes which you are supposed to pay on sales (outputs). This concept is known as Input Tax Credit (ITC).

In simple words, ITC means reducing the taxes paid on inputs from the taxes to be paid on outputs.

How can the credits available in Integrated Goods and Service Tax (IGST), Central goods and Service Tax (CGST) and State Goods and Service Tax (SGST) be cross utilized?

• To set off the liability of IGST, credits available of IGST, CGST and SGST can be utilized.
• To set off the liability of CGST, credits available of IGST and CGST can be utilized.
• To set off the liability of SGST, credit available of IGST and SGST can be utilized.
• Further the credits of CGST and SGST cannot be cross utilized.

Can the GST paid on Reverse Charge be considered as Input Tax?

• Yes, the GST paid on reverse charge can be considered as input tax if such goods and/or services are used, or are intended to be used, in the course or furtherance of his business.

When you are eligible to claim the benefit of input tax to pay the output tax liability?

If the following conditions are satisfied, you are eligible to claim the above benefit:

• Payment to the supplier within 180 days from issue of invoice.
• Inputs and capital goods should not be used for personal purposes.
• Inputs and capital goods should not be used for providing exempt supplies.
• Timely submission of the GST returns.

If the above conditions are not satisfied, you are not allowed to claim credit of taxes paid on inputs.

In Form GSTR-2, point 11 deals with reversal of input tax credit. Following format is seen for reversal of input tax credit:

Now, let’s understand the above table in depth:

Amount in terms of Rule 37(2):
Reversal of Input Tax credit in case of Non-payment of consideration

• If a registered person who has availed input tax credit on any inward supply of goods or services or both, but fails to pay the supplier within a period of 180 days, then ITC availed is to be reversed. If part of the invoice is paid then ITC will be reversed on a proportionate basis.
• The amount of input tax credit shall be added to the output tax liability of the registered person.
• The registered person shall be liable to pay interest not exceeding 18% for the period starting from the date of availing the credit till the date when the amount added to the output tax liability.

Amount in terms of rule 42(1) (m):
ITC on input supplies partly used for business and partly for exempt supplies or personal use:

The ITC used for exempt supplies and personal purpose has to be reversed in GSTR 2.

How to Calculate ITC reversal on Exempt Supplies:

Step 1: Calculate Common Credit

Common Credit = Total ITC on Input Supplies

 (Less) ITC on input supplies used for Personal purposes (non-business)

 (Less) ITC on input supplies used for providing exempt supplies

 (Less) ITC on which credit is not available (section 17(5))

 (Less) ITC on input supplies other than exempted but including zero rated supplies                                  

In simple words, Common Credit is ITC on inputs partly used for exempt supplies or personal use.

Step 2: Amount of reversal of input tax credit attributable to inputs partly used for Exempt supplies

= (Value of Exempt Supplies * Common Credit) / Total Turnover in the State

 How to Calculate ITC on Personal Use: 5 % of Common Credit

The ITC amounts as calculated above has to be reversed in the GSTR 2 filed by the registered person.

Amount in terms of rule 43(1) (h):
ITC on Capital Goods partly used for business and partly for exempt supplies or personal use:

ITC on capital goods used for the supply of exempt supplies and non-business purposes will also be reversed.

The calculation will be similar to the calculation for ITC on inputs used for exempt supplies and personal use.

Step 1: Calculate Common Credit –

Common Credit = ITC on Capital Goods

 (Less) ITC on capital goods put to personal use

 (Less) ITC on capital goods used for exempted goods

 (Less) ITC on capital goods used in supplies other than exempted but including zero      rated supplies (ITC on normal supplies)

Step 2: Amount of ITC reversal attributable to capital goods partly used for Exempt supplies and Personal use

= (Value of Exempt Supplies * Common Credit)/Total Turnover in the State

Step 3: This reversal of input tax credit has to be done on a monthly basis. The life of any asset is considered as 5 years. So the amount of ITC reversal every month will be

= Amount arrived at in Step 2 / 60 (months)

Amount in terms of rule 42(2) (a)
Reversal of ITC on inputs used for exempted/non-business purpose is more than the ITC reversed during the year:

If the total of ITC on input supplies for exempted/non-business is more than total ITC reversed during the year in GSTR-2, then the differential amount should be reversed in GSTR-2 that is it should be added to the output tax liability.

Amount in terms of rule 42(2) (b)
ITC reversed during the year is more than ITC on inputs used for exempted/non-business purpose:

At the year-end after filing GSTR-9 (Annual Return), if the total of ITC reversed is more than the ITC on inputs used for exempted/non-business purposes, then the differential amount should be reclaimed as ITC that is it should be reduced from output tax liability.

Note-:  Input tax credit to the recipient in respect of invoices or debit notes that are not reflected in
his Form GSTR-2A shall be restricted to 10 percent of the eligible credit available in
respect of invoices or debit notes reflected in his Form GSTR-2A as per the press release of the 38^th meeting of the GST Council’s decisions regarding Law and Procedure related changes.