15 March 2024
Capital Assets/ goods input is completely taken during the combined service and reversed within the next 60 months. Currently providing services that are fully taxable, so it's important to determine whether the capital input credit needs to be reversed throughout the reaming period. Kindly give advice and suggestions regarding the right way of reversal input credit.
For example, capital assets purchased in 2018–2019, input took in full, and reversal credit in the next 60 months .we are offering combination services until FY 2022–2023 and completely taxable services starting in FY 2023–2024. Can we liable for input credit reversals for capital assets during the Remain period?
09 July 2024
When dealing with capital assets and input tax credit (ITC) reversals, the GST law provides specific guidelines. The situation you described involves transitioning from providing combined services (exempt and taxable) to fully taxable services. Here’s the appropriate way to handle ITC reversals for capital assets:
### 1. **Capital Goods ITC under GST:** According to the GST rules, ITC on capital goods is allowed to be claimed in full in the year of purchase. However, if the capital goods are used for both taxable and exempt supplies, the ITC needs to be reversed proportionately over a period of five years (60 months).
### 2. **Rule 43 of the CGST Rules:** Rule 43 of the CGST Rules deals with the manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases. This rule requires: - **Initial ITC Claim**: Full ITC is claimed initially. - **Proportionate Reversal**: If capital goods are used for both exempt and taxable supplies, the common ITC is to be reversed proportionately every month for a period of 60 months.
### 3. **Situation Change (From Combined to Fully Taxable Services):** If your services have transitioned to being fully taxable, the need for proportionate reversal of ITC may change as follows:
1. **Period of Combined Services (Up to FY 2022-23)**: - Proportionate reversal of ITC should be done for the period when the capital goods were used for both taxable and exempt supplies. - This involves reversing a part of the ITC every month as per Rule 43 for the period when the services were mixed.
2. **Period of Fully Taxable Services (Starting FY 2023-24)**: - Once you start providing only taxable services, the proportionate reversal of ITC should cease, as all the supplies are taxable. - You should no longer need to reverse the ITC on capital goods for the remaining period as the entire usage of capital goods is for taxable supplies.
### Example:
- **Capital Goods Purchased**: FY 2018-19. - **Initial ITC Claimed**: Full ITC claimed in FY 2018-19. - **Mixed Services Provided**: Up to FY 2022-23. - **Fully Taxable Services**: Starting from FY 2023-24.
### Calculation: - **Reversal Period**: From FY 2018-19 to FY 2022-23, proportionate ITC reversal is required. - **No Reversal Period**: From FY 2023-24 onwards, no further reversal is needed, as services are fully taxable.
### Compliance:
1. **Calculation of Proportionate ITC Reversal**: - Determine the amount of ITC attributable to exempt supplies for each month during the mixed period. - Reverse this proportionate amount monthly up to the end of FY 2022-23.
2. **Recording and Documentation**: - Maintain detailed records of ITC claims and reversals. - Ensure all calculations and adjustments are well-documented for GST audit purposes.
### Legal Reference:
- **Section 17(1) & (2) of the CGST Act**: Deals with apportionment of credit and blocked credits. - **Rule 43 of the CGST Rules**: Specifically lays down the mechanism for ITC reversal on capital goods.
### Practical Steps: 1. **Calculate Total ITC**: Determine the total ITC availed on the capital goods. 2. **Determine Exempt Supply Ratio**: Calculate the ratio of exempt supplies to the total turnover for the period when mixed services were provided. 3. **Monthly Reversal Amount**: Calculate the monthly reversal amount based on the exempt supply ratio and total ITC for the mixed period. 4. **Stop Reversals Post-Transition**: From the date your services become fully taxable, cease ITC reversals.
By adhering to these guidelines, you ensure compliance with GST laws while optimizing your ITC claims. Always consult with a GST professional for precise calculations and compliance.
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