ITC Reversal under GST

While paying taxes to the Government, businesses can use the credit of GST paid on the purchases like raw materials/services used for manufacturing or selling products. It is known as an Input tax credit (ITC). If the input tax credit is wrongly claimed, then it should be reversed by making the payment to that extent next month.

The article dives into the meaning, purpose, and cases under which ITC reversal is required.

Latest Updates on ITC under GST

1st February 2022
Budget 2022 updates-
1. ITC cannot be claimed if it is restricted in GSTR-2B available under Section 38.
2. Time limit to claim ITC on invoices or debit notes of a financial year is revised to earlier of two dates. Firstly, 30th November of the following year or secondly, the date of filing annual returns.
3. Section 38 is completely revamped as ‘Communication of details of inward supplies and input tax credit’ in line with the Form GSTR-2B. It lays down the manner, time, conditions and restrictions for ITC claims and has removed the two-way communication process in GST return filing on the suspended return in Form GSTR-2. It also states that taxpayers will be provided information of eligible and ineligible ITC for claims.
4. Section 41 is also revamped to remove the references to provisional ITC claims and prescribes self-assessed ITC claims with conditions.
5. Sections 42, 43 and 43A on provisional ITC claim process, matching and reversal are eliminated. 

29th December 2021
CGST Rule 36(4) is amended to remove 5% additional ITC over and above ITC appearing in GSTR-2B. From 1st January 2022, businesses can avail ITC only if it is reported by the supplier in GSTR-1/ IFF and it appears in their GSTR-2B.

21st December 2021
From 1st January 2022, ITC claims will be allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the CGST Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.

What does the reversal of ITC mean?

In certain situations, even if the basic conditions for claiming ITC are satisfied, ITC claims must be reversed. Reversal of ITC means the credit of inputs utilised earlier would now be added to the output tax liability, effectively nullifying the credit claimed earlier. Depending upon when such reversal is done, payment of interest may also be required.

Specific conditions for ITC reversal

The ITC is required to be reversed under various scenarios defined in the Act. Some of those scenarios are summarised below:

Calculation of ITC under various rules

Let’s check out the different rules prescribed for calculating the amount of ITC to be reversed:

Before we proceed to discuss each rule, the total ITC can be divided into the following parts:

Specific credit: ITC that can specifically be attributable to a supply – either taxable, non-taxable, or supply consumed for personal use.

Treatment: Separate such ITC amount from the total ITC since it can be easily identified. 

• The amount of ITC that is only directly attributable to a particular taxable supply can be utilised. It is available in the electronic credit ledger.
• Taxpayers must reverse the amount of ITC directly attributable to a particular supply that is non-taxable/used for personal consumption, only when wrongly availed.

Common credit: ITC amount that cannot be attributable to a specific supply but is used for partly making both the taxable and non-taxable supplies/supplies used for personal consumption. 

Treatment: 

• Taxpayers must identify and reverse the proportionate ITC amount to the extent of supplies that are non-taxable/used for personal consumption.
• The remaining ITC left is eligible for the claim.

Rule 42 and 43: ITC reversal on the supplies that are exempt or used for personal consumption

The calculation of ITC to be reversed differs for:

• Inputs or input services- covered by rule 42
• Capital goods- covered by rule 43

Rule 42: Reversal of ITC on inputs/input services

Step-1: Businesses must first segregate the specific credits that are ineligible for the claim,  from the total ITC as follows: 

Note: T1, T2, and T3 must be reported in GSTR 3B at a summary level for every tax head

Step-2: Reduce T1, T2 and T3 from the total ITC and derive the common credit as follows:  

Step-3: Compute the amount of ITC to be reversed out of the common credit as follows:

Based on the above calculations, D1 and D2 will be the ITC that needs to be reversed.  

Illustration:  

Consider the following scenario for the month of July 2020 in relation to supplies made in Karnataka:

Solution: 

C1 = T – (T1+T2+T3);  C1 = 1,50,000 – (7,500+15,000+4,500), therefore, C1 = 1,23,000.

The common credit C2 = C1 – T4 , i.e., C2 = 1,23,000-1,05,000 , i.e., C2 = 18,000. 

D1 = (E÷F) × C2 , i.e., D1 = (2,25,000 ÷ 30,00,000) × 18,000 , i.e., D1 = 1,350.

D2 = 5% of C2 , i.e., D2 = 900.

C3 = C2 – (D1 + D2) , i.e., C3 = 15,750. 

So, out of the originally available ITC of Rs. 1,50,000, only C3 (Rs. 15,750) and T4 (Rs. 1,05,000) were credited ultimately to the electronic credit ledger and D1 (Rs. 1,350) and D2 (Rs. 900) were required to be reversed.

Rule 43: Reversal of ITC on capital goods

The first step is to find out if the ITC falls under the following criteria:

• The ITC is in relation to capital goods that have been used exclusively for non-business purposes or for making exempt outward supplies. OR
• The ITC is in relation to capital goods that have been used exclusively for making supplies other than exempt supplies. Note that this would include zero-rated supplies too.

In case the ITC falls under category ‘A’ above, then credit will not be allowed in respect of the same. In case the ITC falls under category ‘B’ above, then credit will be allowed and taken to the electronic credit ledger. The useful life of capital goods is taken to be five years from the date of invoice. 

This is done so that in case the capital goods were covered in category ‘A’ or ‘B’ as mentioned earlier and are now not covered under either category, then the ITC would be called ‘common credit’ or ‘Tc’ and 5% would have to be deducted from this common credit for every quarter or part quarter for the time it was covered in the category ‘A’ or ‘B’.  

The useful life of the capital goods has been taken as 5 years, but our filing period relates to the supplies made/received in a particular month, so we will first find the ITC attributable to a month by dividing the credit by 60.

Thus, Te calculated above will be the ITC in respect of capital goods that are required to be reserved or added to the output tax liability. Note that the above calculations would slightly differ if the supply is in the nature of services covered under Paragraph 5(b) of Schedule II of the CGST Act. 

Illustration: 

A company operating in Karnataka had availed the following ITC on various capital goods purchased in the month of July 2020:

The company had also made the following type of output supplies in Karnataka in the month of July:

Turnover in relation to exempt supplies: Rs. 20,00,000 
Turnover in relation to taxable supplies: Rs. 80,00,000

Solution: 

ITC on machine A and C will not be credited to the electronic credit ledger (1,50,000+20,000 = 1,70,000). 
ITC on machine B will be credited to the electronic ledger: Rs. 9,00,000 
ITC on machine D will also be credited to the electronic credit ledger: 

Tc = 4,50,000 

Tm = Tc ÷ 60 = 7,500 which is also Tr in this case. 

The amount of ITC to be reversed for the month of July, 2020 would be: = (E ÷ F) × Tr = (20,00,000 ÷ 80,00,000) × 7,500 = 1,875 

Thus, the total ITC credited to the electronic ledger for the month of July 2020 = Rs. 10,70,000 and total ITC reversed for July, 2020 = Rs. 1,875

Rule 44: Reversal of ITC in case of cancellation of GST registration or switches to composition scheme

The aim of this rule is to reverse all the ITC that has been availed by a registered person in the event that he chooses to pay tax under the composition scheme or his registration gets cancelled for any reason.

The calculation is done as follows:

• For inputs held in stock or contained in semi-finished goods and finished goods in stock, the ITC must be reversed is calculated proportionate to corresponding invoices on which credit was taken. Thus ITC will be allowed only up to the time the registered person switches to the composition scheme or on cancellation of registration.
• In the case of capital goods, ITC availed will be based on the useful life (in months) and shall be computed on a pro-rata basis. Thus ITC for the remaining useful life of the asset must be reversed while switching over to the composition scheme or on cancellation of registration.

Rule 44A: Balance transitional ITC to be reversed on 1st July 2017 for gold dore bars

This rule relates to ITC taken under the transitional provisions of the CGST Act. 

It is based on CENVAT credit available under the earlier scheme of taxation in respect of additional duty of customs (section 3(1) of the Customs Tariff Act, 1975) paid for importation of gold dore bars. Where stock of such gold dore bar (raw material) or gold jewellery (final product) lies with the taxpayer on 1 July, 2017, the ITC will be restricted to 1/6th of the credit availed in respect of such gold dore bar.

Hence, 5/6th of the credit availed must be reversed at the time of supply of either the gold dore bar or the gold/gold jewellery made out of it.

Reporting of ITC reversal in GSTR-3B

The amount of ITC reversal needs to be calculated by the taxpayer himself and filled up in Table 4B of GSTR-3B. The ITC reversed that needs to be reported is of two types – 

• ‘As per rules 42 & 43 of CGST/SGST Rules’, where the ITC attributable to exempt or non-business supply is required to be calculated by us using the formula mentioned earlier and entered in this field – thus this field will not be auto-populated; and
• ‘Others’, where ITC reversal due to other circumstances will have to be reported; 

Reporting of ITC reversal in GSTR-9

GSTR-9 (annual return) will also need to be filled up with details regarding ITC reversed for the whole year. Wherever possible, the details will be auto-filled on the basis of the data entered in the monthly form GSTR-3B but changes can be made by the taxpayer wherever required.

Table 7 contains the details of ITC reversed and ineligible ITC for the financial year. The relevant details need to be provided for the whole year accordingly.

How can ClearTax help?

The process of calculation of the reversal ITC and reporting of the same in the relevant GST returns can be made simpler by trying out the smart calculator feature while filing GSTR-9 provided by ClearTax GST.

It downloads the entire year’s data from GSTN easily to file an accurate GSTR-9 and comes with intelligence to reconcile between GSTR-1, GSTR-3B and books of accounts to give suggestions for fixing mismatches.

FAQs

What is ITC reversal?

In a few cases, you have to reverse the ITC as per the GST Act & rules such as payment not made to the seller within 180 days, ITC related to exempt sales, ITC related to personal purposes, etc.

How to do a ITC reversal?

You have to mention the ITC reversal amount due to Rule 42 & 43 or for any other reasons in Table 4B of the GSTR-3B. Also, you have to make annual calculations on ITC reversal and mention the same in GSTR-9.

What is CGST Rule 42 & 43?

CGST Rule 42 deals with the reversal of ITC on inputs and input services, whereas rule 43 deals with the reversal of ITC on capital goods.

Can DRC-03 be used for ITC reversal?

No, you can not use DRC-03 to reverse the ITC. DRC-03 is a voluntary tax payment form to pay the GST liability voluntarily or in response to a show-cause notice (SCN).