Reversal of ITC attributable to exempt services simplified

Saurabh Maheshwari , Last updated: 26 February 2018
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Reversal of ITC of inputs/input services/capital goods used for effecting exempt supplies or for non-business use

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.

Rule 42: Manner of determination of input tax credit in respect of inputs or input services and reversal thereof

As per Rule 42, reversal is required for that portion of common credit which is attributable to exempt supplies or for non-business use. (common credit means that part of ITC which cannot be identified specifically to taxable supplies including zero rated or exempt supplies or non-business rather commonly used for taxable supplies, exempt supplies or/and for non-business use.)

A formula has been prescribed to determine the eligible ITC to be taken removing the ITC attributable to exempt supplies or used for non-business use.

For using that formula, we need to first work out 3 things i.e. common credit (C2), common credit attributable to exempt supplies (D1), common credit attributable to non-business use (D2).

Remainder ITC to be taken removing a part of common credit attributable to exempt supplies etc. denoted by "C3" is: C3= C2 - (D1+D2)

Working of C2, D1 and D2

1. Working of Common credit:

	Particulars	Amount	Remarks
	Gross amount on tax charged on inputs/input services	xxxxx	Gross tax amount in respect of inputs/input services procured
Less:	Ineligible credit as per Sec 17(5) rent a cab, works contract etc.	xxx
Less:	Tax component on goods and services exclusively used for effecting exempt supplies	xxx	Can be identified separately
Less:	Tax component on goods and services exclusively used for non-business use	xxx	Can be identified separately

	Common credit	xxxxx

2. Working of common credit attributable to exempt supplies (D1):

D1 = Aggregate value of exempt supplies X common credit
Total turnover in the state

Where, Aggregate value of exempt supplies to be arrived at as per the below table :

	Particulars	Amount	Remarks
	Value of exempt supplies	xxxx	Exempt supplies defined in Sec 2(47)
Add:	Value of outward supplies on which recipient is liable to pay tax under reverse charge mechanism	xxx	This is for GTA, Legal consultants etc. who has to include this value while arriving at exempt supplies value
Add:	Sale of land	xx
Add:	Sale of Building	xx	If the same is not subject to GST as per Para 5(b) to Schedule II to CGST Act. Sale of building subject to GST only when any amount received by builder before issuance of completion certificate
	Aggregate value of exempt supplies	xxxx

Where, Total turnover the state means exempt plus taxable value of GST supplies including zero rated and non- GST supplies( of that state only) excluding tax amounts.

3. Working of common credit attributable to supplies used in non-business use (D2):

D2= 5% of common credit. As simple as that!!

Now, when we are able to calculate C2, D1 and D2, we can use the above formula i.e. C2- (D1+D2) to calculate the C3 - Final ITC to be taken removing the ITC attributable to exempt/non business use supplies.

Point to be noted:

This C3 has to be calculated separately for CGST, SGST, IGST and UTGST.

This is only to be done for complying with Rule 42.

Rule 43: Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.

ITC attributable on capital goods partly used for taxable supplies and partly used for effecting exempt supplies or for non-business use shall be calculated as under:

= Aggregate value of exempt supplies X ITC on capital goods which has residual life in beginning
Total turnover in the state of tax month i.e. live capital goods with some residual value (Tr)

[In short, the above formula will give us the ITC on common capital goods to be reversed as attributable to use for exempt supplies or/and for non-business use)

Where, Aggregate value of exempted supplies and Total turnover shall be calculated in the similar way as calculated for Rule 42(above)
Where, Tr = Tax paid on procurement of capital goods

60 (5years being treated as life of capital goods under GST law)

Such Tr to be calculated for every capital good having common use (i.e. for taxable as well as non –taxable) every month till its life expires or disposed off.
Tr to be calculated separately for CGST, SGST, IGST and UTGST.
Formula of reversal as above, also need to be applied separately for CGST, SGST, IGST and UTGST every month.

Thanks a lot for reading!

The author can also be reached at saurabhchokhra92@gmail.com