Reverse charges on transport charges

Hi Archan,

Your query on reverse charge on transport charges and ITC treatment is quite common. Here's a clear explanation:

Context:

• You have transport services on which GST is paid under Reverse Charge Mechanism (RCM).

• These transport services are related to nil-rated supplies (i.e., zero-rated or exempt supplies).

• So, you are paying GST under RCM on transport, but your output supplies are nil-rated, meaning you have no output GST liability.

• This causes accumulation of ITC (paid on RCM) that cannot be set off against output tax.

Your questions:

1. Is there any possibility to get refund of this ITC?

• Under GST law, ITC on input services used exclusively for making zero-rated supplies (like exports) can be claimed as refund.

• However, if your output supplies are exempt or nil-rated, generally refund of ITC is not allowed.

• Exception: If these are services used in export of goods/services with payment of IGST, refund can be claimed.

• If transport services are for exempt supplies, you cannot claim refund on ITC paid on RCM.

2. If no refund, how to utilize this ITC?

• ITC can be utilized only against output GST liability (CGST, SGST, IGST).

• Since output supplies are nil-rated/exempt and attract no GST, you have no output liability to adjust ITC against.

• So, the accumulated ITC is blocked and you have to bear the cost (cash outflow).

Summary:

Suggestions:

• Review if transport services relate to any taxable output; if yes, ITC can be used against output GST.

• Otherwise, consider cost absorption as input tax on exempt supplies is a cost to business.

• Maintain proper documentation and segregation of such expenses.