20 February 2024
In a factory there are 2 activities happening: in 1 part manufacturing and other part has been given on rent. Now from manufacturing both taxable and exempt supplies are made. So while calculating reversal under rule 42, in total supplies and taxable supplies figure, will we take rent income also? If yes, then why we will include this amount as it has nothing to do with manufacturing process, so no question of including it for reversal purpose arises. And if no, then is it somewhere written in law?
11 July 2024
Under GST law, specifically under Rule 42 of the CGST Rules, 2017, the input tax credit (ITC) reversal on inputs and input services used for both taxable and exempt supplies is calculated based on a formula. Let's address your query in detail:
1. **Reversal Under Rule 42:** - Rule 42 deals with the apportionment of input tax credit where inputs and input services are used for both taxable and exempt supplies. The idea is to ensure that only the credit attributable to taxable supplies is claimed, as credit attributable to exempt supplies is not eligible.
2. **Components of the Formula:** - The formula for reversal under Rule 42 includes the following components: \[ ITC reversal = (Common Credit) \times \left( \frac{\text{Value of Exempt Supplies}}{\text{Total Turnover}} \right) \] Where: - **Common Credit:** Input tax credit attributable to inputs and input services used for both taxable and exempt supplies. - **Value of Exempt Supplies:** Total value of exempt supplies made during the tax period. - **Total Turnover:** Total value of all supplies (taxable + exempt) made during the tax period.
3. **Treatment of Rent Income:** - Rent income received by the factory from leasing out a part of its premises is not directly related to the manufacturing activities. Therefore, this income would generally not be included in the "Total Turnover" or "Value of Exempt Supplies" figures for the purpose of calculating the reversal under Rule 42. - The logic is that rent income is typically considered separately from the manufacturing or business activities for which the ITC reversal under Rule 42 is applicable.
4. **Legal Basis:** - While the GST law and rules do not explicitly mention the treatment of rent income in the context of Rule 42, it is understood through the principles of indirect tax laws that only the turnover related to taxable and exempt supplies under GST should be considered for such calculations. - Since rent income is not part of the turnover derived from manufacturing activities or related sales of goods, it does not fall within the scope of turnover used for ITC reversal calculations.
**Conclusion:** Therefore, rent income earned from leasing out part of the factory premises should generally not be included in the turnover figures used for calculating ITC reversal under Rule 42. This aligns with the principle that only turnover directly related to taxable and exempt supplies should be considered for determining the proportion of ITC that needs to be reversed.
It's advisable to consult with a GST practitioner or a tax advisor for specific advice tailored to your situation, especially considering any nuances or specific circumstances that may apply to your factory's operations.
CAclubindia
