When and Why is ITC Reversal Required under GST?

ITC Reversal under GST

Businesses can benefit from the Input Tax Credit (ITC) related to GST on expenses for materials and services in production or sales. However, an incorrectly claimed ITC must be reversed by repaying the amount in the following month. This guide delves into the nature, intent, and conditions requiring ITC reversal.

Budget 2022 Updates:

• ITC claims are restricted if not allowed in the GSTR-2B as per Section 38.
• The deadline for claiming ITC on fiscal year invoices/debit notes is 30th November of the next year or the date of annual return filing.
• Section 38 is revised as ‘Communication of inward supplies and ITC’, tied to Form GSTR-2B, outlining ITC eligibility.
• Section 41 now removes provisional ITC, permitting only self-assessed ITC claims.
• Sections 42, 43, and 43A concerning provisional ITC claims are repealed.

On 29th December 2021: CGST Rule 36(4) was updated to disallow the extra 5% ITC over what's in GSTR-2B. From 1st January 2022, ITC can only be claimed if reported in GSTR-1/IFF and shown in GSTR-2B. On 21st December 2021: Starting January 2022, taxpayers cannot claim the provisional 5% ITC under CGST Rule 36(4).

Understanding ITC Reversal:

Despite meeting the base conditions for ITC, certain scenarios necessitate ITC reversal, requiring previously claimed input credits to be added back to the output tax liability. This may involve interest payment.

Specific ITC Reversal Scenarios:

The Act includes several reversal situations, like:

• CGST Rule 37: Unpaid supplier for over 180 days.
• CGST Rule 37A: Supplier not paying tax by the 30th of September following the year.
• CGST Rule 38: Banking institutions reversing 50% ITC under specific rules.
• CGST Rule 42: Use of inputs for exempted supplies or personal purposes, applied monthly/yearly.
• CGST Rule 43: Pertains to capital goods for similar purposes as Rule 42.
• CGST Rule 44: GST cancellations or composition scheme transition require filing form REG-16.
• CGST Rule 44A: ITC reversal on gold dore bar stocks as of July 2017 at the point of supply.
• Section 16(3): Claiming depreciation on GST-qualified capital goods entails a reversal.
• CGST Section 17(5): Blocked credits undergo reversal during regular returns filing.

ITC Reversal Calculation:

Calculating involves splitting ITC into specific and common credits, using formulas to find non-taxable or personal use reversals. Specific rules like Rule 42 and Rule 43 provide guidance for inputs or capital goods, respectively.

Reporting and Filing:

ITC reversals must be reported in GSTR-3B and GSTR-9, through manual calculation by taxpayers or automated tools such as ClearTax for precision. Proper understanding and correct return filing can ease ITC reversals, aiding businesses in adhering to GST regulations.