Reversal of ITC under GST

Neethi V. Kannanth , Last updated: 25 July 2022  
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Reversal of ITC means reversal of ITC utilized earlier. By doing this, there will be an increase in the output tax liability and interest may also be required to be paid depending on when the ITC is reversed.

When is ITC required to be reversed?

The ITC is required to be reversed in the following situations-

  1. The recipient has failed to pay consideration to the supplier for a particular supply and a period of 180 days has lapsed from the date of 180 days has lapsed from the date of issue of invoice
  2. If the depreciation has been claimed on the GST component of the capital goods purchased, then, ITC must be reversed at the time of closing of books of that financial year
  3. Inputs have been used to make exempt supply, ITC shall be reversed on a periodic basis as explained in Rule 42 below upon identifying such ITC have been claimed.
  4. If the inputs have been used for manufacturing purposes and some of which have been used for non business or personal purposes, then ITC shall be reversed on a periodic basis as explained in Rule 42 below upon identifying such ITC have been claimed.
  5. Upon cancellation of GST registration, ITC shall be reversed while filing Form Reg-16.
  6. Reversal of 50% of ITC by the banking and other financial companies under special rules shall be done at the time of filing of regular returns
  7. Reversal of 5/6th of the ITC taken on gold dores as on 1st July, 2017 shall be done at the time of supply of gold dore bar or gold or gold jewellery
  8. If ITC is availed on blocked credits, then, ITC shall be reversed at the time of filing of regular returns. However, such reversal shall only be done till the date of filing annual returns.
  9. In case of inputs used in goods that were lost, stolen, destroyed etc, then, ITC shall be reversed at the time filing of return in relation to the month in which such loss had occurred
  10. If inputs were given out as free samples, then, ITC shall be reversed while filing the regular returns for the month in which such free samples were given out.
Reversal of ITC under GST

Rule 42: Reversal of ITC on inputs/input services

Step-1: Businesses must first segregate the specific credits that are ineligible for the claim, from the total ITC as follows:

Variable used

Formulae/ Explanation

T

Total input tax paid credit on inputs and input services

T1

Out of 'T', the specific credit attributable to inputs/input services intended to be used for non-business purposes

T2

Out of 'T', the amount of input tax attributable to inputs/input services intended to be used exclusively for effecting exempt supplies

T3

Out of 'T', the amount of input tax deemed as 'blocked credits' under section 17(5)

Note: T1, T2, and T3 must be reported in GSTR 3B at a summary level for every tax head

Step-2: 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 for making taxable supplies. This would also include zero-rated supplies like exports and supplies to SEZ.

C2

Common credit C1 - T4

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

Step-3: Compute the amount of ITC to be reversed out of the common credit as follows:

D1

The ITC attributable towards exempt supplies out of common credit: (E÷F) × C2, Where:

  • E: Aggregate value of exempt supplies during the tax period
  • F: Total turnover in the State of the registered person during the tax period

Note: For building construction services, (E÷F) will be calculated on a project basis, where:

  • E stands for aggregate carpet area of exempt construction project or apartments sold after construction is over
  • F stands for aggregate carpet area of the apartments in the project

D2

Deemed to be ITC attributable for non-business purposes out of common credit: 5% of C2

C3

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

Based on the above calculations, D1 and D2 will be the ITC that needs to be reversed. 

Rule 43: Reversal of ITC on capital goods

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

  • The ITC is in relation to capital goods that have been used exclusively for non-business purposes or for making exempt outward supplies. OR
  • The ITC is in relation to capital goods that have been used exclusively for making supplies other than exempt supplies. Note that this would include zero-rated supplies too.

In case the ITC falls under category 'A' above, then credit will not be allowed in respect of the same. In case the ITC falls under category 'B' above, then credit will be allowed and taken to the electronic credit ledger. The useful life of capital goods is taken to be five years from the date of invoice.

This is done so that in case the capital goods were covered in category 'A' or 'B' as mentioned earlier and are now 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 it was covered in the category 'A' or 'B'. 

The useful life of the capital goods has been taken as 5 years, but our filing period relates to the supplies made/received in a particular month, so we will first find the ITC attributable to a month by dividing the credit by 60.

Variable used

Formulae / Explanation

Tm

Tc ÷ 60 Amount of ITC attributable to a tax period (a month) on common capital goods during their useful life

Tr

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

Te

This is the common credit attributable towards exempted supplies, which is calculated as follows: (E ÷ F) × Tr, Where:

  • E: Aggregate value of exempt supplies made during the tax period
  • F: Total turnover in the State of the registered person during the tax period
  • Note: For building construction services, (E÷F) will be calculated on a project basis, where:
  • E stands for aggregate carpet area of exempt construction project or apartments sold after construction is over
  • F stands for aggregate carpet area of the apartments in the project

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. Note that the above calculations would slightly differ if the supply is in the nature of services covered under Paragraph 5(b) of Schedule II of the CGST Act.

Rule 44: Reversal of ITC in case of cancellation of GST registration or switches to composition scheme

The aim of this rule is to reverse all the ITC that has been availed by a registered person in the event that he chooses to pay tax under the composition scheme or his registration gets canceled for any reason.

The calculation is done as follows:

  • For inputs held in stock or contained in semi-finished goods and finished goods in stock, the ITC must be reversed and is calculated proportionate to corresponding invoices on which credit was taken. Thus ITC will be allowed only up to the time the registered person switches to the composition scheme or on cancellation of registration.
  • In the case of capital goods, ITC availed will be based on the useful life (in months) and shall be computed on a pro-rata basis. Thus ITC for the remaining useful life of the asset must be reversed while switching over to the composition scheme or on cancellation of registration.
 

Latest Updates on ITC under GST

1st February 2022

  1. ITC cannot be claimed if it is restricted in GSTR-2B available under Section 38.
  2. Time limit to claim ITC on invoices or debit notes of a financial year is revised to earlier of two dates. Firstly, 30th November of the following year or secondly, the date of filing annual returns.
  3. Section 38 is completely revamped as 'Communication of details of inward supplies and input tax credit' in line with the Form GSTR-2B. It lays down the manner, time, conditions and restrictions for ITC claims and has removed the two-way communication process in GST return filing on the suspended return in Form GSTR-2. It also states that taxpayers will be provided information of eligible and ineligible ITC for claims.
  4. Section 41 is also revamped to remove the references to provisional ITC claims and prescribes self-assessed ITC claims with conditions.
  5. Sections 42, 43 and 43A on provisional ITC claim process, matching and reversal are eliminated.

29th December 2021

CGST Rule 36(4) is amended to remove 5% additional ITC over and above ITC appearing in GSTR-2B. From 1st January 2022, businesses can avail ITC only if it is reported by the supplier in GSTR-1/ IFF and it appears in their GSTR-2B.

 

21st December 2021

From 1st January 2022, ITC claims will be allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the CGST Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.


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Neethi V. Kannanth
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Category GST   Report

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