Reversal of input tax credit under GST
Reversal of Input Tax Credit Under GST: A Complete Guide
In this post, we will discuss the important scenarios and requirements that firms need to reverse previously claimed Input Tax Credit (ITC), as well as how to calculate and report it correctly under GST.
Let’s look at each section in detail:
What Is the Reversal of ITC?
In certain situations, the ITC must be reversed even if the conditions for claiming it are not satisfied. This means that the claimed advantage will be cancelled, and the previously used credit will be applied to the output tax liability. Interest may also be required if the reversal happens after the deadline.
Specific conditions for ITC reversal
A number of requirements in the GST Act require the reversal of the Input Tax Credit (ITC). A summary of the main scenarios are mentioned below:
Relevant GST Section/Rule | Circumstances | Time of ITC Reversal |
CGST Rule 37 | Payment to the supplier (full or partial) remains unpaid for a particular supply. | Within 180 days from the invoice date. |
CGST Rule 37A | Tax for a financial year is not discharged through GSTR-3B by the supplier. | On or before 30th November of the following financial year. |
CGST Rule 38 | Banking/financial companies must reverse 50% of ITC under special rules. | While filing regular returns. |
CGST Rule 42 | Inputs are used for exempt supplies or for non-business/personal purposes. | Periodically (monthly/yearly) using a prescribed formula for common credits. |
CGST Rule 43 | Capital goods are used for exempt supplies or non-business/personal purposes. | Periodically (monthly/yearly) using a prescribed formula for common credits. |
CGST Rule 44 | GST registration is cancelled, or the taxpayer opts for a composition scheme | During the filing of Form REG-16 for cancellation or via ITC-03 while switching to the composition scheme. |
CGST Rule 44A | Reversal of ITC on gold dores in stock as of 1st July 2017. | At the time of supplying gold dore bars, gold, or gold jewellery. |
Section 16(3) | GST component on capital goods is included in depreciation under Income Tax. | During the closing of books for the relevant financial year. |
CGST Section 17(5) | ITC is availed on blocked credits. | While filing regular returns up to the annual return filing date. |
CGST Section 17(5)(h) | Inputs are lost, stolen, destroyed, or disposed of as free samples. | In the returns for the month when the loss or free distribution occurred. |
CGST Section 17(5)(i) | Tax is paid as per GST demands related to fraud cases (Section 74). | In the returns for the month when the GST demand is settled. |
How to Calculate ITC Reversal?
Different rules define how businesses must reverse input tax credit (ITC) under GST. Here’s an easy Summary:
1) Specific Credit
Certain credit is ITC that is specifically tied to a certain supply, such as taxable, exempt, or for personal use. This credit should be clearly marked and separated from the overall ITC. You can use particular ITC to pay tax on the relevant taxable supply, which is recorded in your computerized credit ledger. However, if an ITC is incorrectly claimed for non-taxable supplies or personal use, it must be refunded.
2) Common Credit
ITC is a popular credit that applies to both taxable and nontaxable supply, as well as personal usage. Because this sort of ITC is not attached to a specific source, firms must calculate and reverse the portion attributed to non-taxable supplies or personal use. The remaining amount may be claimed as ITC.
3) Rules 42 and 43
Rule 42: Covers ITC reversal for inputs and input services used for exempt supplies or personal consumption. The formula for this is:
D1 = (T1 × T2) / T3
- D1: ITC to be reversed.
- T1: Common credit for inputs and services during the tax period.
- T2: Value of exempt supplies in that period.
- T3: Total turnover of the registered person in the same period.
Rule 43: Deals with ITC reversal for capital goods utilized as exempt supplies or for personal use. It involves spreading the reversal of ITC across the useful life of capital items.
Rules and provisions related to the reversal of Input Tax Credit of GST
The procedures for computing ITC reversal ensure compliance with GST laws in certain scenarios:
Rule 37:
If the recipient fails to pay the supplier within 180 days of the invoice date, the ITC claim must be reversed. If only a portion of the invoice is paid, the reversal is calculated proportionally.
Rules 42 & 43:
These apply to inputs used for personal or non-business purposes. If the ITC is directly related to non-taxable, taxable, or personal usage, the amount is reversed. If the ITC is not directly traceable, it is reversed proportionally based on the amount of non-taxable or personal usage. The computation is different for inputs, input services, and capital goods.
Rule 44:
This rule comes into play when taxpayers cancel their GST registration or switch to the composition scheme. ITC reversal for stock (raw materials, semi-finished, or finished items) is based on invoice information. Capital goods are calculated pro rata, taking into account their useful life in months.
Section 17(5):
ITC must be reversed for goods or services used personally, destroyed, lost, or distributed as free samples or gifts. Any blocked credits from this section are also reversed.
Reporting ITC Reversal
ITC reversal reporting requires careful attention in both the GSTR-3B and GSTR-9 forms.
In GSTR-3B, taxpayers must figure out the amount of ITC to be reversed and enter it into Table 4B. This contains two categories: ITC reversal under rules 42 and 43 of the CGST/SGST Rules, which apply to exempt or non-business goods and must be manually calculated, and ITC reversal under “Others,” which applies to other situations that require changes.
Details of ITC reversal for the whole financial year must be recorded in Table 7 of GSTR-9 (annual returns). While some data may be automatically completed based on GSTR-3B submissions, taxpayers can make any necessary changes or additions.
Conclusion
Under GST, reversing the Input Tax Credit (ITC) is critical to ensuring tax compliance. Businesses must understand when and how to reverse ITC to avoid penalties and additional tax charges. There are special procedures for reversing ITC in situations such as nonpayment, personal usage, or changes in tax schemes. Correctly calculating and reporting ITC reversals in GST returns is important for maintaining accurate tax records and complying with rules.
And with that, we concluded this post. Please leave any questions or comments in the space provided below; we are happy to help.
FAQs
1.What is an ITC reversal?
Ans: In certain cases, you must reverse the ITC in line with the GST Act and rules, such as when payment is not given to the seller within 180 days, ITC connected to exempt sales, ITC related to personal reasons, and so on.
2.What are the CGST Rules 42 & 43?
Ans: CGST Rule 42 deals with the reverse of ITC on inputs and input services, while Rule 43 deals with the reversal of ITC on capital goods.
3.How do I reverse an excess ITC claim?
Ans: In the event of wrongful/excess ITC claims, the previously used input credit is added to the output tax liability in the tax period during which the ITC becomes invalid. This effectively reverses the ITC claim made earlier.
4.When is the last date for ITC reversal
Ans: The date of ITC reversal is determined by the rule or section of the CGST Act under which the reversal is to be done.
