28 June 2019
Hi, We supply MEIS licenses the entire process for license application is done inhouse that is no outside consultation is taken and therefore we do not avail any itc on such service.. However now when i have applied for refund against exportrs the assessing officer is asking me to reverse proportionate ITC on such licenses sold .Sale of license is an exempt supply. and we are not availing any ITC on aqusition of such license. How can i convince the AO. And what would be the relevant sections which state that ITC on exemt services are ineligible.
28 June 2019
Sec 17(2) of the CGST Act, 2017 provides that where the goods or services are used partly for effecting taxable supplies (including zero rated) and partly for exempt/ non-business use then the amount of credit as attributable to exempt supplies or non-business use shall be reversed as per Rule 42/43 of the CGST Rules, 2017.
28 June 2019
Hello Sir, But when no credit has been availed does the rule still apply . because this would then amount to undue hardship to the taxpayer.
28 June 2019
The ITC on any expenditure shall be reversed proportionately only if such expenditure is used for effecting taxable and exempted supplies. If none of the common services is used for effecting exempted supplies, then credit shall not be required to be reversed. As the section 17(2) clearly specifies that if the supplies are used for effecting taxable and exempted supplies then only credit is required to be reversed proportionately if not, no reversal is required.
02 August 2024
### **ITC and Exempt Supply (MEIS Licenses)**
The issue you're facing involves the sale of MEIS licenses, which is considered an exempt supply under GST, and whether ITC should be reversed on the sale of such licenses.
Here's a detailed approach to address this issue:
#### **1. Understanding ITC Reversal on Exempt Supplies**
Under GST law, if you make both taxable and exempt supplies, you must reverse ITC attributable to the exempt supplies. This is to ensure that the ITC on inputs and input services is not used for making exempt supplies.
#### **Relevant Sections and Rules:**
1. **Section 17(2) of the CGST Act:** - This section deals with the apportionment of ITC between taxable and exempt supplies. It states that ITC cannot be claimed to the extent it is used for making exempt supplies.
2. **Rule 42 and Rule 43 of the CGST Rules:** - Rule 42 deals with the apportionment of ITC where both taxable and exempt supplies are made. - Rule 43 deals with the reversal of ITC on capital goods used for both taxable and exempt supplies.
3. **Section 17(3):** - This section defines the types of supplies that do not qualify for ITC, including exempt supplies.
#### **2. Applicability of ITC Reversal:**
Since MEIS licenses are exempt, any ITC on inputs or input services that are used to produce these licenses would generally need to be reversed, even if no credit has been claimed. The rationale is that the ITC cannot be used to subsidize exempt supplies, regardless of whether the credit was actually availed.
#### **3. Addressing the AO's Concerns:**
1. **Clarify the Applicability:** - **Emphasize that the rules apply** regardless of whether ITC was actually claimed. The law mandates reversal of proportionate ITC based on the value of exempt supplies made, irrespective of whether ITC was availed.
2. **Provide Documentation:** - Show relevant documentation and calculations, including the basis of your claim that no ITC was availed on services related to the MEIS licenses.
3. **Cite Relevant Sections:** - Refer to Sections 17(2), 17(3), and Rules 42 and 43 as mentioned above. Explain that while you did not claim ITC, the rules for reversal of ITC on exempt supplies still apply as a precautionary measure to prevent misuse.
4. **Legal Precedents and Case Laws:** - If necessary, cite case laws or legal precedents where courts or tribunals have upheld the interpretation of ITC reversal rules in similar scenarios.
5. **Undue Hardship Argument:** - Present an argument that requiring reversal of ITC where no credit was actually claimed creates undue hardship and may be contrary to the principles of fairness and justice.
#### **4. Steps to Follow:**
- **Document Everything:** Ensure you have all relevant documentation to support your claim that ITC was not availed. - **Prepare a Detailed Submission:** Draft a detailed explanation addressing the AO’s concerns, referencing relevant sections of the law. - **Seek Professional Advice:** If the issue remains unresolved, consider seeking advice from a GST expert or tax consultant to provide a more robust defense or representation before the AO.
### **Conclusion:**
While the reversal of ITC on exempt supplies is mandated under GST rules, the AO should consider that if no credit was availed, it might be a matter of undue hardship. Present all relevant information and legal references to support your case.
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