written by Khatabook | September 22, 2021

Know About ITC reversal under GST

Input tax credit or ITC means that when you pay tax on your output, you can deduct the tax you had already paid on your inputs. If you are a registered Goods and Services Tax (GST) manufacturer, agent, supplier, e-commerce operator, or aggregator, you are qualified to claim input credit for tax paid on your purchases.

For Example, let’s suppose a manufacturer has paid Rs 1000 on the output (a product manufactured) and has paid Rs 600 on the input (purchases made). He can claim input credit of Rs 600 and only Rs 400 needs to be deposited by him as taxes. This article covers everything you need to know about I TC reversal and rules 42 & 43 CGST/SGST rules. 

Reversal of ITC

In some cases when even if the conditions for claiming ITC are met, ITC claims must be overturned. ITC reversal means that the credit for previously used inputs (purchases) is added to the output tax liability, nullifying the previously claimed credit. Payment of interest may also be required depending on when such reversal occurs.

Conditions for ITC Reversal in GST

There are several instances where the ITC must be reversed, as outlined in the Act. Listed below are a few of these scenarios:

Event

When ITC reversal needs to be done 

(Wholly or partially) for a particular supply, the recipient fails to pay consideration to the source

Within 180 days of the invoice date.

Depreciation has been claimed under the Income Tax Act on the GST component of purchased goods.

ITC Reversal is required at the end of the financial year when closing the books.

Inputs were employed to create a tax-exempt supply.     

Calculate common credits on a monthly or annual basis. If inputs are solely utilised to make exempt supply, reverse it as soon as it is discovered that it has been claimed as a deduction.

Some of the supplies manufactured using the inputs were used for personal or non-business purposes.      

Once you've determined that an ITC has been claimed, reverse it. If the inputs are solely due to a supply utilized for consumption, calculate common credits monthly or annually.

Reversal of 50% of ITC financial institutions or banks under special rules

While filing regular returns.

As of 1st July, 2017 - 5/6th of the amount of ITC taken on gold bars in stock must be reversed.

When the gold jewellery or gold bars are delivered.

ITC availed on ‘blocked credits.’            

While submitting regular returns and until submitting an annual return

Inputs used in lost, stolen, or destroyed goods         

When you're filling out your regular tax returns for the month in which the loss occurred.

Inputs for things that were either utilised or distributed for free         

As soon as you file your monthly tax returns for the month in which you distributed the free samples, if applicable.

Also Read: Types of GST Returns: Forms, Due Dates & Penalties

Calculation of ITC

Let's look at the various rules for calculating the amount of ITC to be reversed. Before describing each rule, it is important to remember that the overall ITC can be broken into the following sections:

  1. Specific Credit: Directly attributable ITC for taxable, non-taxable, or personal use supplies.

Treatment: 

  • Because such ITC is easily identifiable, separate it from the total ITC.
  • Only the amount of ITC that is directly attributable to a specific taxable supply may be used. It is offered in the form of an electronic credit ledger.
  • Taxpayers should reverse the amount of ITC for a specific supply that is non-taxable/used for personal use, i.e., when wrongfully availed.

 

  1. Common Credit: The ITC amount cannot be attributed to a single supplier but is used as part of a personal consumption budget for taxed and non-taxed goods purchased by the individual.

Treatment:

  • The taxpayer's responsibility is to identify and reverse the proportionate amount of ITC based on the amount of non-taxable/personal spending.
  • The remainder of the ITC is claimable.

Rule 42 and 43 of CGST/SGST Rules

ITC reversal is possible on exempt products or commodities used for personal use. The calculation of ITC to be reversed varies in the following ways:

Rule 42 applies to inputs or input services.

Rule 43 applies to capital commodities.

Rule 42: ITC reversal on input services/inputs

Step-1:  Businesses should first separate the individual credits that are not claimable from the total ITC as follows: 

Variables used and formulae/explanation

T

Total input tax credit paid on inputs and input services

T1

Out of ‘T’, the specific ITC attributed to inputs services/inputs intended for non-commercial use

T2

Out of ‘T’, the amount of ITC related to inputs/input services utilized only to effect exempt deliveries

T3

Out of ‘T’, the amount of ITC considered to be "blocked credits" under Section 17 (5)

Note: T1, T2, and T3 must be stated at the summary level in GSTR 3B for each tax head.

Step-2: Subtract T1, T2, & T3 from the total ITC to arrive at the common credit:

C1= T – (T1 + T2 + T3): ITC credited to electronic credit ledger

T4

Specific credit for input services/inputs used solely to make taxable supplies. This category includes zero-rated supplies such as exports and supply to SEZs.

C2 (Common credit) = C1 – T4   

It is possible to claim ITC on inputs used in part to make taxable supply and in part to make exempt supplies or for a non-business purpose or personal use.

Step-3: Calculate the amount of ITC that must be reversed from the common credit

D1- The ITC attributable to exempt supplies derived from common credit: (E÷F) × C2 

Where,

E

Total turnover in the state where the registered person stayed during the tax period. 

F

Total turnover in the State where the registered person stayed throughout the tax period.

D2= 5% of C2: Considered to be ITC traceable for non-commercial reasons arising from common credit

C3: Balance eligible ITC out of common credit= C2 – (D1 + D2)

Based on the calculations above, D1 & D2 are the ITCs that must be reversed.

Illustration of ITC reversal:

Scenario:  Supplies made by ABC company in the month of August, 2020 to XYZ Company in Maharashtra.

Total ITC available (T) 

Rs. 1,75,000

ITC on inputs/supplies used by the business owner personal use (T1)

Rs. 10,000

ITC related to exempt inputs/supplies (T2)

Rs. 15,000

Blocked credits (for example, GST portion paid in respect of transport services used) (T3)

Rs. 6,000

Input Tax credit solely for taxable supplies (T4)

Rs. 1,15,000

Total value of exempt supplies made in August (E)

Rs. 2,50,000

Total turnover (F)

Rs. 40,00,00

Solution: 

C1 = T – (T1+T2+T3)

C1 = 1,75,000 – (10,000+15,000+6,000) 

Therefore, C1 = 1,44,000 

The common credit: C2 = C1 – T4 , 

C2 = 1,44,000-1,15,000 

Therefore, C2 = 29,000

D1 = (E÷F) × C2 

D1 = (2,50,000 ÷ 40,00,000) × 29,000 

Therefore, D1 = 1,813 

D2 = 5% of C2 ,

Therefore, D2 = 1450 

C3 = C2 – (D1 + D2)

Therefore, C3 = 29000 - (1813+1450)= 25,737 

So, out of the original ITC of Rs. 1,75,000, only C3 (Rs. 25,737) and T4 (Rs. 1,15,000) were credited eventually to the electronic credit ledger. D1 (Rs. 1,813) and D2 (Rs. 1.450) were required to be reversed.

Rule 43: ITC Reversal on capital goods

The first stage is to determine whether the ITC meets either of the following criteria:

  1. ITC applies to capital items utilized only for exempt outgoing deliveries or non-business purposes.

 OR

  1. ITC is available for capital goods that are used solely to produce non-exempt supplies. Note: zero-rated goods such as exports and supplies to Special Economic Zones in India (SEZ) would be included in the scope of this.

If the ITC falls under category 'A' above, no credit will be given for the ITC itself. Assuming the ITC comes under category B, a credit will be awarded and recorded in the credit ledger. A five-year useful life is assumed for capital goods.

So, if the capital goods were previously covered under the category 'A or B, but are no longer covered under either, the ITC would be referred to as Tc or 'common credit, and 5 % needs to be deducted from common credit for every part-quarter or quarter it was covered under category 'A' or 'B'.

The capital items are considered to have a five-year useful life. Still, because our reporting period is based on supplies received/made in a certain month, we will first calculate the monthly ITC by dividing the credit by 60.  

Variables/Formulae Explanation

Tm= Tc ÷ 60   Amount of ITC attributable to a tax period (a month) on common capital items over the course of their useful life.

Tr: Aggregate of (Tm) total of all capital items with usable life remaining at the start of the tax period

Te: This is the common credit for exempted supply, which is calculated as per formula: (E ÷ F) × Tr

Where,

E

The total amount of exempt goods/supplies made during the tax period.

F

Total turnover of the registered person during the tax period. 

The amount Te, together with the appropriate interest, shall be added to the output tax liability of each tax period during the useful life of the involved capital goods.

Also note that the following estimates would alter slightly if the supply were of the type covered by paragraph 5(b) of the CGST Act, Schedule II. 

Rule 44: ITC Reversal in the event of GST registration cancellation or transition to composition scheme

The purpose of this rule is to reverse the ITC that a registered person has received if their registration is cancelled for whatever reason or they choose to pay tax under the composition scheme.

The ITC for inputs kept in stock or contained within semi-finished or finished goods available in stock should be reversed and calculated proportionately to the bills on which credit was claimed. If the registered person moves to the composition scheme or cancels the registration, ITC will be granted.

ITC will be determined pro-rata for the capital goods. Because of this, upon cancelling registration or changing to the composition scheme, the ITC for the asset's remaining useful life needs to be reversed.

Rule 44A: As of 1st July 2017, the balance transitional ITC for gold bars will be reversed. This rule applies to ITC claims under the CGST Act's transitional provisions. For gold bars (raw material) or gold jewellery (finished product) held by the taxpayer as of July 1, 2017, the ITC is limited to 1/6th of the credit claimed for such bars. This provision means that a full 5/6ths of a credit line must be repaid at the time of delivery of either the gold bar or the gold/gold jewellery created from the raw gold bars.

Reporting of ITC Reversal in GSTR-3B

The taxpayer must determine the amount of ITC reversal and enter it into Table 4B of GSTR-3B. ITC reversal that must be reported falls into two categories –

  • As per rules 42 & 43 of CGST/SGST Rules, the ITC attributable to non-business or exempt goods must be computed using the method indicated previously and entered in this area – so this field is not auto-populated
  • 'Others,' where an ITC reversal owing to other conditions must be disclosed.

Reporting ITC Reversal in GSTR-9 

Annual return GSTR-9 also needs to be filled out with information on ITC reversed for an entire year. Where possible, details are auto-filled based on the data submitted in the monthly GSTR 3B form, although the taxpayer can make modifications as needed. 

This table displays the ineligible ITC and ITC reversed for the fiscal year. You must provide the appropriate information for the entire year.

Also Read: GSTR 9 Due Date Extended: Common issues faced by CAs while filing GSTR 9

Conclusion

Any wrongly claimed input tax credit should be reversed the next month by paying that amount. It helps to maintain the credit of inputs that have been used earlier so that they can be added to the output tax liability. This would nullify the credit effectively that has been claimed earlier. Lastly, the interest on ITC reversal depends on the reversal done. Thus, we hope, through this article, you have understood the rules and process of ITC reversal under GST. You can refer to the Khatabook app for more information regarding ITC and GST compliance, among other useful information.

FAQs

1. What is ITC ( Input Credit Tax)?

The Input Tax Credit, or ITC, is a tax that a firm pays on purchases and can utilize to decrease its tax liability when it sells. In other words, businesses can lower their tax bill by claiming a credit for GST paid on purchases.

2. What is Input Credit Tax reversal?

If a registered person receives an input tax credit for any inward supply of goods or services, or both, but fails to pay the provider within 180 days, the ITC is reversed. If only a portion of the invoice is paid, the ITC will be reversed proportionately.

3. Is interest valid on reversal of ITC?

Section  43 contains similar provisions dealing with credit notes. As a result, the rate of interest for reversal of ITC is 24% p.a. exclusively in the case of reclaiming previously reversed credit. In all other circumstances, interest shall be charged at the rate of 18% p.a.  u/s 50 (1).

4. How to do a reversal of ITC under GST?

Any wrongly claimed input tax credit should be reversed the next month by paying that amount. The reversed ITC must be added to output liabilities. In addition, the amount of ITC to be reversed shall be divided into IGST, CGST, SGST, and Cess and recorded in the GSTR9 form.

5. Is it possible to reverse ITC in GSTR 9?

In GSTR 9, UT reversals can be reported under table 7A and 7E. To comply with Rule 37 of CGST/SGST Rules requirements, registered individuals must reverse the ITC claims on inward supplies they have not paid the supplier for within 180 days of receipt of the invoice.

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