Pravin
Under GST, a registered person can use input tax on purchase to pay output GST Tax on supply/sale.
Apart from general ITC rule and list of ineligible ITC, availed ITC of input supplies needs to be reversed on subsequent occurrence of the below-mentioned event:
1. Recipient of supply Doesn’t pay to the supplier within 180 days of issue of the invoice.
2. Recipient of supply uses input goods/services for any purpose other than business or for supplying exempted supplies [like Personal use]
3. Recipient of supply uses capital goods for any purpose other than business or for supplying exempted supplies
4. A person transfer his regular GST registration into Composite Scheme [u/s 18(4)] or Cancels GST registration [u/s 29(5)]
5. A person sells Capital good or Plant and machinery [u/s 18(6)]
The input taxes of goods and services get automatically reflected in Form GSTR 2A and its reversal is required in form GSTR 2. ITC of capital goods doesn’t get automatically reflected in Form GSTR 2A.
Let’s understand above events one-by-one !!
1. ITC Reversal on failure to pay Supplier
If a person fails to pay a supplier within 180 days of issue of invoice, ITC already availed on such supply need to be reversed in Form GSTR 2.
In case of part payment (incl. GST), ITC on non-paid amount needs to be reversed.
This reversed ITC will be added to the output GST liability of the dealer as CGST, SGST/UTGST or IGST or cess (if applicable) with appropriate interest.
Example:
Mr.Ram, a cloth trader, In the month of Sept 2017 purchases a shirt for Rs.1,050/- (1000+50 IGST) from Mr.Shyam and sales the shirt for Rs.1,260/-(1200+60 IGST).
GST payable for Sept 17= output IGST – input IGST = 60-50 = Rs.10/- only.
If later on Mr.Ram fails to pay Mr.Shyam within 180 days from the date of invoice, Mr.Ram is required to reverse ITC (Rs.50/-) in Form GSTR 2 for the month immediately after the expiry of said 180 days.
Exceptional cases
In the following 2 cases, reversal of ITC is not required even if the payment is not made within 180 days:
- Where goods or service are received for free [Money or kind consideration is not involved]
- Where the recipient incurs cost on behalf of the supplier. The recipient can take ITC of that cost because this cost is included in the invoice and GST is charged by the supplier.
2. ITC reversal if goods/services used for personal purpose
Availed ITC of input or input service needs to be reversed in Form GSTR 2 if such input or input service is used for any purpose other than business (personal) or for supplying exempted supplies (not zero-rated supply).
For reversal in every month, we have to separately identify input which has been used for making exempted supplies or for personal purpose. Availed ITC of these identified inputs will be reversed.
For unidentified input, we have to calculate common ITC of input used for both exempted supply and personal purpose.
Step 1:
| Calculation of Common ITC | |
| ITC on all input supplies | xx |
| Less: | |
| ITC of supplies used for the personal purpose (Identified) | (xx) |
| ITC of supplies used for making Exempted supplies (Identified) | (xx) |
| ITC of supplies on which credit is not available [u/s 17(5)] | (xx) |
| ITC of supplies used for making taxable supplies (include zero-rated supply) | (xx) |
| Common ITC | xxx |
Step 2:
Reverse ITC of input used for making Exempted supplies in a month
= [Value of exempted supply in a month for a state / Value of total supply in a state of a month] X Common ITC
Step 3:
Reverse ITC of input used for the personal purpose in a month = Common ITC X 5%
Final Step:
Again, the same calculation needs to be finally calculated at the end of the financial year.
If ITC reversal for the year is more than the aggregate ITC reversal of 12 months, the difference of ITC reversal should be added in the output GST liability with an appropriate interest in any month not later than the month of September of the year following the end of the financial year to which such ITC relates.
Example:
Aggregate ITC reversal of 12 months in the financial year 2017-18 is Rs.10,000/-. But ITC reversal calculation at the end of financial year is Rs.12,000/-.
The excess requirement of ITC reversal i.e Rs.2,000 (12000-10000) should be added to the output GST liability of any month not later than September 2018 with appropriate interest.
This reversed ITC will be added to the output GST liability of the dealer as CGST, SGST/UTGST or IGST or cess (if applicable) with appropriate interest. (maximum 18%)
Similarly, If ITC reversal for the year is less than the aggregate ITC reversal of 12 months, the difference of ITC reversal should be claimed as input tax credit (ITC) in any month not later than September.
3. ITC Reversal if Capital Goods Used for Personal Purpose
Availed ITC of Capital goods needs to be reversed in Form GSTR 2 if such Capital goods are used or intended to be used for any purpose other than business (personal) or for supplying exempted supplies.
Similar to the previous case, first for each month, we have to separately identify ITC of capital goods which are used for making exempted supplies and for personal purpose.
A person should disclose input tax(ITC) of these identified capital goods in the Form GSTR 2. In this case, ITC reversal is not required.
For unidentified supplies, we have to calculate common ITC of capital goods used for both exempted supply and personal purpose. This common ITC in capital goods should first be taken to E-Credit ledger and its reversal will be done on a monthly basis.
Step 1:
| Calculation of Common ITC in Capital Goods | |
| ITC on purchase all Capital goods | xx |
| Less: | |
| ITC of capital goods used for the personal purpose (Identified) | (xx) |
| ITC of capital used for making Exempted supplies (Identified) | (xx) |
| ITC of capital goods used for making taxable supplies (include zero-rated supply) | (xx) |
| Common ITC in capital goods | xxx |
**
| Special calculation of Common ITC of Capital goods | |||
| Sl no | Situations | Common ITC | |
| Previously | Currently | ||
| 1 | Capital good was used exclusively for non-business purposes or for providing exempt supplies | Capital good is used for both business and non-business purposes or for providing exempt supplies | ITC less 5% of ITC for every quarter |
| 2 | capital good was used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies | same as above | same as above |
Step 2:
Common ITC for a month = common ITC / 60
[a capital asset is presumed to have a life of 5 yrs i.e 60 months from the date of invoice]
Step 3:
ITC reversal of common ITC for a month =
The calculation in step 2 X [Value of exempted supply in a state of a month / Value of total supply of a state in a month]
This reversed ITC will be added to the output GST liability of the dealer as CGST, SGST/UTGST or IGST or cess (if applicable) with appropriate interest.
4. Change GST registration from Normal to Composite Dealer or Cancels Registration
In respect of Input goods, when a person changes his registration from normal to a composite scheme or cancels the registration, he needs to pay the amount of availed ITC held in stock, semi-finished and finished goods.
The input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit had been availed on such input.
If the invoice is not available, use prevailing market price and it should be duly certified by a practicing chartered accountant or cost accountant.
Similarly, in respect of Capital goods held in stock, such persons are required to pay the input tax credit (ITC) attributable to remaining useful life computed on pro-rata basis, taking the useful life as 5 years. (see the example)
Example (Source: CGST Rule):
- Capital goods have been in use for 4 years, 6 month and 15 days.
- The useful remaining life in months= 5 months ignoring a part of the month.
- Input tax credit is taken on such capital goods= C
- Input tax credit attributable to remaining useful life= C multiplied by 5/60
Furnish ITC Details
1. By dealer transferring normal GST registration into composite Scheme registration in FORM GST ITC 03.
2. By dealer canceling GST registration in FORM GSTR-10.
5. ITC Reversal on Sale of Capital Goods or Plant and Machinery
In case of sale/supply of capital goods or plant and machinery, availed ITC on such capital goods should be paid (reversed) by the seller/supplier. [under section 18(6) of CGST Act]
Reversal shall be higher of the following:
- Input tax credit (ITC) less 5% of ITC for every quarter or part thereof from the date of the issue of the invoice for such goods.
- Tax on the transaction value of such capital goods or plant and machinery[under section 15 of CGGST]
Source: CGST Rule 2017 (Latest)
