Rule 42 Calculation

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Astaf Mansuri (Querist)
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23 December 2024 My case is under assessment, officer is not accepting the rule 42 calculation made by us, and he has alo presented his calculation,
i am explaning with illustration

Eg.
We are trader as well as manufacturer, we used to trade exempt items and taxable items, and products outcome of manufacturers.
Following are the data, based on that calculate reversal of ITC as per rule 42 of the CGST Act.
Total Inward Supplies – Rs.10,00,000 bifurcated as below:
Wheat (Exempt) – 2,00,000
Cotton (Processed) (Not require to manufacturer, available to sale in pack to pack condition) Rs. 3,00,000 ITC on the same Rs. 15,000
Cotton(Unprocessed- require in manufacturer) Rs. 5,00,000 ITC on the same is Rs. 25,000

Now Total Outward supplies are Rs. 11,75,000 which is as below:-
Wheat (Exempt) – Rs. 2,50,000
Cotton Processed (Not required in manufacture)- Rs. 3,50,000 output Tax on the same is Rs. 17,500
Out of unprocessed cotton manufacturing process manufacture goods output is Processed Cotton & Oil (Taxable) Rs. 5,25,000 tax on the same is Rs. 20,000, and by product cattle feed of Rs. 50,000 – Exempt not liable for GST.

Calculation presented by US:

Step 1: Breakdown of Inputs and ITC
Total Inward Supplies – ₹1,000,000
1. Cotton (Processed - Not required in manufacturing): ₹300,000
o ITC: ₹15,000
2. Cotton (Unprocessed - Used in manufacturing): ₹500,000
o ITC: ₹25,000
o
Step 2: Breakdown of Outward Supplies
Total Outward Supplies – ₹1,175,000
1. Cotton Processed (Not required in manufacturing): ₹350,000
o Output Tax: ₹17,500 (Taxable supply)
2. Processed Cotton & Oil (Taxable): ₹525,000
o Output Tax: ₹20,000 (Taxable supply)
3. By-product Cattle Feed (Exempt): ₹50,000
o Exempt supply (no ITC available for this).

Step 3: Calculate Exempt Turnover for ITC Reversal
Exempt Turnover (based on outward supplies):
• Exempt Supplies: ₹50,000 (Cattle Feed)
• Taxable Supplies: ₹350,000 (Processed Cotton) + ₹525,000 (Processed Cotton & Oil) = ₹875,000
• Total Turnover = ₹50,000 (Exempt) + ₹875,000 (Taxable) = ₹925,000
Exempt Turnover Ratio:
Exempt Turnover Ratio= Exempt Turnover = 50000 = 0.0540 5(≈5.4%)
Total Turnover 925000

Step 4: Reversal of ITC on Common Inputs (Cotton Unprocessed)
• ITC on Cotton (Unprocessed): ₹25,000 (this is the common input used for both taxable and exempt supplies).
ITC to be Reversed (as per Rule 42):
ITC to be Reversed = ITC on Common Inputs × Exempt Turnover Ratio

=25,000×0.05405

=₹1,351.25 (rounded to ₹1,351)

Step 5: Final ITC Available for Claim
• ITC exclusively for taxable supplies (Cotton Processed - Not used for manufacturing): ₹15,000
• Available ITC on Common Inputs (Cotton Unprocessed):

Available ITC on Common Inputs = 25,000 − 1,351 = ₹23,649
• Total ITC Available:
Total ITC Available = ₹15,000 + ₹23,649 = ₹38,649

Summary of ITC Reversal:
• Total ITC Claimed: ₹40,000 (₹15,000 + ₹25,000)
• ITC Reversed: ₹1,351
• Net ITC Available: ₹38,649

calculation suggest by officer:

Step 1: Breakdown of Inputs and ITC
Total Inward Supplies – ₹1,000,000 (bifurcated as below):
Wheat (Exempt): ₹200,000
ITC: Not applicable for exempt supply.
Cotton (Processed - Not required in manufacturing): ₹300,000
ITC: ₹15,000
Cotton (Unprocessed - Used in manufacturing): ₹500,000
ITC: ₹25,000

Step 2: Outward Supplies (Sales)
Total Outward Supplies – ₹1,175,000 (bifurcated as below):
Wheat (Exempt): ₹250,000
Exempt supply, no ITC to be claimed for this.
Cotton Processed (Not required in manufacturing): ₹350,000
Output Tax: ₹17,500 (Taxable supply)
Processed Cotton & Oil (Taxable): ₹525,000
Output Tax: ₹20,000 (Taxable supply)
By-product Cattle Feed (Exempt): ₹50,000
Exempt supply, no ITC to be claimed for this.

Step 3: Exempt Turnover Calculation for ITC Reversal
Exempt Turnover (based on outward supplies):
Exempt Supplies: ₹250,000 (Wheat) + ₹50,000 (Cattle Feed) = ₹300,000
Taxable Supplies: ₹350,000 (Processed Cotton) + ₹525,000 (Processed Cotton & Oil) = ₹875,000
Total Turnover: ₹300,000 (Exempt) + ₹875,000 (Taxable) = ₹1,175,000
Exempt Turnover Ratio:
Exempt Turnover Ratio
=
Exempt Turnover/Total Turnover
=
300000 / 1175000 = 0.2553

≈ 25.53 %

Step 4: Reversal of ITC on Common Inputs (Cotton Unprocessed)
ITC on Cotton (Unprocessed): ₹25,000 (common input, used for both taxable and exempt supplies).
ITC to be Reversed (as per Rule 42):

ITC to be Reversed=ITC on Common Inputs × Exempt Turnover Ratio
=25,000×0.2553 = ₹6,383(rounded to ₹6,383)

Step 5: Final ITC Available for Claim
ITC exclusively for taxable supplies (Cotton processed – not used in manufacturing): ₹15,000

Available ITC on Common Inputs:
Available ITC on Common Inputs
=25,000−6,383=₹18,617

Total ITC Available=₹15,000+₹18,617=₹33,617

Summary of ITC Reversal:
Total ITC Claimed: ₹40,000 (₹15,000 + ₹25,000)
ITC Reversed: ₹6,383
Net ITC Available: ₹33,617

Please share your views with explanation.