Businesses often use the same assets and inputs for both business & personal use. For example, Ms. Anita owns a grocery shop. She rents a 2-storey building and uses the ground floor for her shop and 1st floor of the same building as residence. The input credit of GST paid on rent will be allowed only to the extent it pertains to her business. Ms. Anita also has an attached land where she grows vegetables and sells them in her shop. The same property or common property is used for 3 separate reasons- taxable sales, exempted sales (vegetable) and personal expenses (residence). While Ms Anita is eligible to claim input credit for GST paid by her on her business expenses, some of the expenses are used for both business and nonbusiness purposes. The GST in rent (GST is applicable since it is let out for commercial purposes) is the common credit.
ITC is only available for business purposes. Many traders use the same inputs for both business & personal. A taxpayer is not allowed to claim any input credit for GST paid on personal expenses. Again, goods exempted under GST already enjoy 0% GST. ITC cannot be claimed for inputs used in such exempted goods as it will lead to negative taxation. So, ITC on inputs for exempted goods will also have to be removed. The following will help you to calculate the common credit that belongs to personal supplies & exempted supplies leaving only the portion that pertains to taxable supplies. You will have an amount you are eligible to claim as ITC while filing your GST Returns. The credit that is attributable to personal supplies & exempted supplies must be reversed in GSTR-2. Click here to find out the reversal process in GSTR-2.
Let us understand the calculations through an example. Details for the month of May 2018 are as follows:
So, Ms. Anita’s total input tax will have 4 parts:
Step 1: Finding out total eligible ITC
Available credit C1 = Total ITC – [ITC for personal supplies + ITC for exempted supplies + Non-eligible ITC] = T- (T1 +T2 +T3 ) = 1,00,000-(5000+20,000+10,000) = 65,000
This step calculates the available credit, i.e., the total eligible credit. This is derived by removing ITC on all personal inputs, all exempted inputs, non-eligible ITC. This amount will be credited to the electronic ledger. You have to reverse the common ITC for personal supplies, exempt supplies & non-eligible supplies in your GSTR-2.
Step 2: Finding out ITC pertaining to personal supplies & exempt supplies
Common Credit C2 = Input Tax credited to Electronic Credit Ledger (C1) – Input Tax for taxable supplies (T4 ) = 65,000 – 10,000 = 55,000
This shows the common credit which has to be shared between taxable supplies, personal supplies and exempt supplies. In our example, it could be the rent paid for the building. The GST component of the residence portion will be reversed. This Common credit will be divided into 3 parts:
Step 2.1: Partly Exempted
The portion of ITC pertaining to exempted supplies is calculated by the following formula:
So by our example,
The formula calculates the amount by the proportionate method. The amount of Rs. 22,000 is deemed to be the amount of ITC pertaining to exempted supplies (vegetables) and must be reversed in GSTR-2.
Step 2.2: Partly Personal
There are many common expenses such as rent, electricity, water bill which are used for both business & personal purposes. This formula will help to segregate the amount of credit that pertains to personal purposes. D2 = 5% of Common Credit So by our example, D2 = 5% of 55,000 = 2,750 The formula calculates the amount by assuming 5% of inputs are used for personal purposes. The amount of Rs. 2,750 is deemed to be the amount of ITC pertaining to personal supplies and must be reversed in GSTR-2.
Step 2.3: Normal portion
Finally, we calculate the portion of common credit that pertains to the taxable supplies (such as rent portion for the shop). C3 = Common Credit – [ITC portion for exempted supplies (D1) + ITC portion for personal supplies (D2)] = 55,000 – (22,000+2,750) = 30,250 This is the common credit attributable to normal supplies.
Step 3: Finally, calculating the total ITC you can claim
Total eligible ITC for the month = ITC for normal supplies + Common credit for normal supplies = 10,000 + 30,250 = 40,250
If you check the GSTR-2 format, you will find that total ITC during the year as per annual return has to be calculated. If there’s a difference between the ITC of annual return & the total ITC claimed during the year then there will be a refund or interest depending on the situation. Now, the same calculations must be done for the whole financial year before the end of the due date of furnishing the annual return. Here let’s suppose the total eligible credit differs from the above calculations in the following manner:
Example 1: ITC as per annual return of 2017-18 is more than actually claimed
At year-end, total eligible credit is 50,000. Here (50,000 – 40,250) = 9,750 will be allowed to be claimed as credit for any month before September 2018.
Example 2: ITC as per annual return of 2017-18 is less than actually claimed
At year-end total eligible credit is 30,000 Here (40,250 – 30,000) = 10, 250 will be added to output tax liability and interest @ 18% would be payable from 1st April 2018 till date of actual payment.
From the above calculations, it is clear that ITC Rules for Common Credit under GST have been meant to be followed strictly to avoid interest and other recovery mechanisms. ClearTax GST Software will take care of your ITC by automatically calculating the common credit. We also have a offline GST Calculator which will help you to calculate the tax liability well in advance so that you can be cash ready.