Reversal of common ITC availed on inputs and input services
By: – Shilpi Jain
Goods and Services Tax – GST
Dated:- 17-12-2018<\/p>\n
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.
\nIn 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.
\nCredit Reversal under Goods & Services Tax
\nSection 17(2) of the CGST A<\/p>\n
= = = = = = = =<\/p>\n
Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 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: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ommon ITC at both these units during the FY: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n = ₹ 26 Lakhs = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ts of the entire project. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n","protected":false},"excerpt":{"rendered":" Reversal of common ITC availed on inputs and input servicesBy: – Shilpi JainGoods and Services Tax – GSTDated:- 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 … Continue reading “Reversal of common ITC availed on inputs and input services”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-15534","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/15534","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15534"}],"version-history":[{"count":0,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/15534\/revisions"}],"wp:attachment":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15534"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15534"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15534"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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\nSay 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,
\nITC to be reversed = ₹ 5,000\/- (i.e. 15,000 * 1,00,000 \/ (1,00,000+2,00,000)).
\n Now let's discuss a few more scenarios to understand the same in detail:
\n Scenario 1: M\/s. ABC Ltd has turnover of ₹ 45 lakhs from Jul '17 to Mar '18 as below:
\n * Jul'17 to Feb'18 – only taxable turnover of ₹ 5 lakhs per month
\n * Mar '18 – taxable turnover of ₹ 3 lakhs and exempted turnover of ₹ 2 lakhs
\nFurther, total ITC during Jul '17 to Mar '18 is ₹ 4,20,000\/- out of which common ITC is ₹ 20,00<\/p>\n
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\nUnit A – ₹ 12 lakhs
\nUnit B – ₹ 20 lakhs
\nTotal common ITC = ₹ 32 lakhs
\nIn this case the ITC reversal for M\/s. XYZ would be ₹ 23.56 lakhs [ i.e. 32 * 810\/1100]
\nHowever, if these 2 units were separately registered under GST then the credit reversal would be as under:
\nUnit A = ₹ 1.2 lakhs [i.e. 12 * 10%}
\nUnit B = ₹ 16 lakhs [i.e. 20 * 80%]
\nTotal ITC reversal = ₹ 17.20 lakhs
\nThereby, it can be seen that by taking separate registration, the quantum of reversal of common credits for Unit A would reduce substantially.
\nScenario 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.
\nYear
\nTaxable Turnover
\nExempted Turnover
\nCommon ITC
\n1
\nNo
\nNo
\nNo
\n2
\nYes
\nNo
\nNo
\n3 (O<\/p>\n
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\n * Year 2 – 18 Lakhs
\n * Year 3 – ₹ 6 lakhs (for before OC procurements) and ₹ 2 lakhs (for after OC procurements)
\n * Year 4 – ₹ 1 Lakh
\nThe 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.
\nIn Year 4, any credit accumulated would be relating to exempt supplies and thereby entire credit would not be eligible.
\nThus, 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.
\nConclusion:
\nThus, we can observe tha<\/p>\n
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\nAt 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.
\nRefering to section 17(2) it clearly restricts use of ITC to the extent of taxable supply.
\nSuppose 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.
\nNow 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.
\nIf 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.
\nAs consultants One should not go for this option unless and until supported by clients and they are willing to take risk of litigation.
\n Dated: 18-12-2018
\n Reply By KASTURI SETHI as =
\nNice article indeed.
\n Dated: 13-7-2019<\/p>\n
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