Reversal of common ITC availed on inputs and input services
By: – Shilpi Jain
Goods and Services Tax – GST
Dated:- 17-12-2018
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 A
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reby can be availed/reversed by September 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 ₹ 20,00
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ommon ITC at both these units during the FY:
Unit A – ₹ 12 lakhs
Unit B – ₹ 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 (O
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= ₹ 26 Lakhs
* Year 2 – 18 Lakhs
* Year 3 – ₹ 6 lakhs (for before OC procurements) and ₹ 2 lakhs (for after 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 tha
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ts of the entire project.
At present even in service tax audits ongoing by the department they have started issuing SCN to assesse even when we are strong on legal grounds in service tax.
Refering to section 17(2) it clearly restricts use of ITC to the extent of taxable supply.
Suppose there are 100 units in a building to be constructed, cement , steel , flooring etc on all the items GST ITC has been availed which has been used in all 100 units.
Now till the time of OC only 30 flats are sold ! So would the builder enjoy ITC on all 100 flats ?? Against output GST of only 30 flats ?? Defies logic.
If department goes into litigation and demand is confirmed it will attract reversal of GST along with 24% interest as it will amount to wrong availemnt of credit.
As consultants One should not go for this option unless and until supported by clients and they are willing to take risk of litigation.
Dated: 18-12-2018
Reply By KASTURI SETHI as =
Nice article indeed.
Dated: 13-7-2019
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