Input Tax Credit Under GST | ITC Reversal Process Explained With Examples



Input tax credit claim is one of the challenges for businesses. This article gives you the ITC reversal process and overview.

What is Input Tax Credit ? It is the part of GST which has always been very important for the taxpayers.

Claiming eligible ITC under GST is the right of every taxpayer and should be exercised with due diligence. The taxpayers should take utmost care that they DO NOT claim the ineligible ITC.

Many times, due to not meeting certain conditions for claiming ITC under GST, the already claimed ITC has to be reversed.

This article will provide some insights into the ITC reversal process under GST.

Stick till the end of the article to understand the complete ITC reversal process and the precautions to take so that you face no need to reverse the already claimed Input Tax Credit under GST.

What is Input Tax Credit Reversal under GST?


In the GST structure, when a taxpayer claims the taxes he has already paid on his inward purchases, he claims GST Input Tax Credit.

Now, to claim this Input Tax Credit, this taxpayer/business has to meet the following conditions:

  • Settlement of pending payments to your supplier is to be done within six months (180 days) from the transaction date.
  • The input purchases and the capital goods on which the ITC is to be claimed should NOT be consumed for personal use.
  • These input purchases and the capital goods should not have been used for providing the exempt supplies.

Suppose a taxpayer/ business does not meet the above given primary conditions. The business or taxpayer is NOT allowed to claim Input Tax Credit on the GST paid on these inputs or purchases.

However, the details of these transactions are reflected in your GSTR-2A form.

Hence, the taxpayers are now required to reverse the ITC based on their GSTR-2A while their GSTR-3B returns filing.

Input Tax Credit Reversal under GST in GSTR-3B

In GSTR-3B form the Table 4 (B) deals with the ITC reversal details as shown below.


There are two fields in this section:

  1. According to Rule 42 & 43 of SGST/CGST Rules :
  • Following these rules, the input tax credit claimed on the inputs or purchases of products or services which are further used partly for business and partly for non-business purposes must be reversed.
  • When input supplies include nil-rated supplies, exempt goods, then Input Tax Credit reversal is required.
  • Input Tax Credit on the capital goods, which is further used for making exempt supplies, nil-rated supplies or taxable must be furnished. Out of this, the ITC on the goods which are NOT used for a business purpose must be 'Reversed'.
  1. Others:
  • In this section of the GSTR-3B format, the taxpayer must mention other ITCs that need to be reversed according to his purchase registers and books of accounts.

NOTE: It has been clarified by the CBIC that, to check and confirm you eligible for Input Tax Credit for a particular month, GSTR-2B will be considered the authoritative source.

Hence, it would help if you reconciled your GSTR-2B against your Purchase Register for claiming the eligible Input Tax Credit under GST.

Reconciliation in ITC is vital in your Input Tax Credit claiming journey.

Rule 42 of CGST Act-On ITC Reversal on Inputs

  1. Rule 42: Reversal of Input Tax Credit on Inputs

Let us understand this rule with an illustration to calculate ITC reversal according to Rule 42 of the CGST Act.

Consider the following details of ‘Alok Traders’ for April 2021 for supplies made in Pune, Maharashtra.

Heads

Details

Total ITC Available (T)

? 2,30,000

ITC on input supplies for personal use (T1)

? 10,300

ITC on inputs used for making exempt supplies (T2)

? 19,000

Blocked credits (e.g. GST on Personal travel fare) (T3)

? 4,400

ITC on taxable supplies made (T4)

? 1,60,000

Aggregate values of exempt supplies (E)

? 3,10,000

The total turnover of the firm 'Alok Traders’ (F)

? 35,00,000

So, according to the above data.

ITC credit according to the electronic ledger (C1) = T – (T1+T2+T3);

C1 = 2,30,000 – (10,300+19,000+4,400) 

Therefore, C1 = ? 1,96,300

Now, the Common Credit (C2) = C1 – T4

C2 = 1,96,300-1,60,000 ,

C2 = 36,300

Now,

ITC towards exempt supplies from common credit (D1) = (E/F) × C2

D1 = (3,10,000 ÷ 35,00,000) × 36,300

D1 = 3215

Now,

ITC for non-business supplies out of common credit (D2) = 5% of C2

D2 = 5% of 36,300

D2= 1,815

Now,

Remaining eligible ITC from the common credit (C3);

C3 = C2 – (D1 + D2)

C3 = 36,300 – (3215 + 1815)

C3 = 31,270

Hence, in the above example of ITC Reversal, we can conclude that:

  1. Out of available ITC of 2,30,000 , only C3 (31,270) & T4 (1,60,000) are credited to the electronic ledger.
  2. D1 (3,215) & D2 (1,815) need to be reversed.

So, the total ITC reversal for 'Alok Traders’ will be ? 5,030.

Rule 43 of CGST Act on ITC Reversal for Capital Goods under GST

According to Rule 43 of the CGST Act, The ITC should fulfil the following criteria:

  1. The Input Tax Credit is related to the capital goods used for personal or non-business use or for making exempt outward supplies.
  2. The Input Tax Credit is related to the capital goods used for making supplies other than exempt supplies, including nil-rated supplies.

Important terminologies in this rule:

Acronym

Meaning

TC

Common Credit

TM

Amount of ITC on capital goods during their useful life

TR

Aggregate Tm of capital goods whose useful life is remaining at the beginning of the tax period

TE

Common credit for exempted supplies

Let us understand this rule with an example:

A firm ‘Alok Traders’ in Pune, Maharashtra:

ITC on Machine 1 (used exclusively for the supply of exempted goods): ?. 80,000;

ITC on Machine 2 (used exclusively for the supply of taxable goods): ?. 43,000 ;

ITC on Machine 3 (used exclusively for personal/non-business purpose): ?25,000;

ITC on Machine 4 (used partly in the supply of taxable and exempt goods): ? 72,000; 

Following are the details of the supplies made by the firm:

Turnover of exempted supplies (E) = ? 10, 00,000

Turnover of taxable supplies (F) = ? 35, 00,000

In this example,

ITC on Machine 1 & 2 will NOT be allowed: (80,000 + 25,000) = ? 1, 05,000

ITC on Machine 2 will be allowed: ?. 43,000 

ITC on Machine 4 will also be allowed (Common Credit) TC= ? 72,000;

TM = TC / 36 (considering the life of capital goods is 3 years i.e. 36 months).

TM = 72,000 / 60 = 2000

Thus for this example, the ITC to be reversed will be given as:

(E / F) * TR

In this way, the reversed ITC is calculated following Rule 43 of the CGST Act.

ITC Reversal reporting in annual GSTR-9 returns

The annual return filed under GST is the GSTR-9 return.

The taxpayer or business will be required to provide the details of the ITC reversed during the entire tax period in his GSTR-9 returns under GST.

The data entered in the monthly GSTR-3B form will get auto-populated in the GSTR-9 of the taxpayer. However, the taxpayer can make changes t this auto-populated data in his GSTR-9 form.

Table 7 of the GSTR-9 form contains the complete details of the reversed Input Tax Credit during the financial year. This table also shows the details of the ineligible ITC for that year.

Input Tax Credit & Reconciliation go hand in hand.

GSTR-2B has made the reconciliation task much easier for the taxpayers to claim maximum ITC.

However, the accountants and the tax professionals tend to use the GSTR-2B reconciliation tool to claim accurate and maximum eligible Input Tax Credit under GST.

An automated solution like GSTHero can help you claim maximum eligible ITC with a completely automated solution and also free up your capital so that your business continues running smoothly.

An automated solution such as GSTHero will provide you:

  • Every month’s GSTR-2A within seconds
  • GSTR 2A reconciled with Purchase register in just 5 minutes
  • Each invoice goes through 100+ validation checks
  • Advanced filters ensure accurate reconciliation
  • Contact GST defaulting suppliers

Stay updated. Stay ahead!

Until the next time…..

About the Author– GSTHero– Making GST Simple!

GSTHero is the best GST filing, e-Way Bill Generation & E-Invoicing Software in India. GSTHero is a government-authorized GST Suvidha Provider. Both Businesses and Tax Practitioners can file GSTR 1, GSTR 3B, GSTR 9, and GSTR 9C with all supporting reports. 1 Click Auto Reconciliation & report-matching feature helps you in claiming up to 100% ITC and finds your GST Defaulting Suppliers. GSTR2A vs GSTR-3B, GSTR-1 vs GSTR-3B, ‘GSTR-1, GSTR-2A & GSTR-3B’ annual report matching is also provided by GSTHero.

GSTHero ERP Plugins provide 1 Click e-Way Bill & E-Invoice, Generation, Operation & Printing from your ERP like Tally, SAP, Marg, Busy, Microsoft Dynamics, Oracle & others itself with high data security.

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