Understanding ITC Reversal in GST: Rules, Calculations & Reporting

Understanding ITC Reversal in GST: Rules, Calculations & Reporting

ITC Reversal under GST

Businesses can use the credit of GST paid on purchases like raw materials and services used for manufacturing or selling products, known as Input Tax Credit (ITC), while paying taxes to the Government. However, if the ITC is claimed incorrectly, it must be reversed by making the payment to that extent in the following month.

The article delves into the meaning, purpose, and cases in which ITC reversal is required.

Budget 2022 updates-

1. ITC cannot be claimed if it is restricted in GSTR-2B under Section 38.

2. The time limit to claim ITC on invoices or debit notes of a financial year is revised to the earlier of two dates: 30th November of the following year or 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 Form GSTR-2B. It lays down the manner, time, conditions, and restrictions for ITC claims. It also provides information to taxpayers about eligible and ineligible ITC for claims.

4. Section 41 is also revamped to remove references to provisional ITC claims and prescribe 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 the additional 5% 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. Therefore, taxpayers can no longer claim 5% provisional ITC under CGST Rule 36(4) and must ensure that every ITC value claimed is 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 that the credit of inputs utilized earlier will now be added to the output tax liability, nullifying the credit claimed earlier. Depending on when such reversal is done, payment of interest may also be required.

Specific conditions for ITC reversal

The Act defines various scenarios in which ITC is required to be reversed. Some of these scenarios are summarized below:

Relevant GST section/rule Circumstances When is ITC reversal required

CGST Rule 37 The recipient fails to pay consideration to the supplier (whether fully or partly) for a particular supply Within 180 days from the date of issue of the invoice.

CGST Rule 37A The supplier fails to pay tax through GSTR-3B by 30th September of the following year Before 30th November of the following financial year.

CGST Rule 38 Reversal of 50% of ITC by banking and other financial companies under special rules At the time of filing regular returns.

CGST Rule 42 Inputs used to make an exempt supply or for manufacturing supplies, some of which were used for non-business or personal purposes On a periodic basis (monthly/yearly) using a formula given below for common credits.

CGST Rule 43 Capital goods used to make an exempt supply or for manufacturing supplies, some of which were used for non-business or personal purposes On a periodic basis (monthly/yearly) using a formula given below for common credits.

CGST Rule 44 Cancellation of GST registration or switching to the composition scheme While filing form REG-16 under various situations explained in detail in our article on the cancellation of GST registration or through ITC-03 while opting for the composition scheme.

CGST Rule 44A Reversal of 5/6th of the ITC taken on gold dore bars in stock as on 1st July 2017 At the time of supply of either the gold dore bar or the gold/gold jewelry.

Section 16(3) Depreciation under the Income Tax Act has been claimed on the GST component of capital goods purchased Reversal is required at the time of closing books of accounts for that financial year.

CGST Section 17(5) ITC has been availed on 'blocked credits' At the time of filing regular returns up to the date of filing annual returns.

CGST Section 17(5)(h) Inputs used in goods that were lost, destroyed, stolen, etc. At the time of filing the regular returns in relation to the month in which such loss occurred.

CGST Section 17(5)(h) Inputs used in goods that were given out as free samples At the time of filing the regular returns in relation to the month in which such free samples were given out.

Unblock working capital with 100% input tax credit claims

Calculation of ITC under various rules

Let's examine 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 attributed to a supply - either taxable, non-taxable, or supply consumed for personal use.

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

The amount of ITC that is directly attributable to a particular taxable supply can be utilized and is available in the electronic credit ledger.

Taxpayers must reverse the amount of ITC directly attributable to a particular supply that is non-taxable or used for personal consumption, but only when wrongly availed.

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

Treatment:

Taxpayers must identify and reverse the proportionate ITC amount to the extent of supplies that are non-taxable or used for personal consumption.

The remaining ITC is eligible for the claim.

Rule 42 and 43: ITC reversal on 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. This can be done by using the following formulas:

T - Total input tax paid credit on inputs and input services

T1 - Out of 'T', the specific credit attributable to inputs/input services intended to be used for non-business purposes

T2 - Out of 'T', the amount of input tax attributable to inputs/input services intended to be used exclusively for effecting exempt supplies

T3 - Out of 'T', the amount of input tax deemed as 'blocked credits' under Section 17(5)

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:

C1 - ITC credited to the electronic credit ledger T - (T1 + T2 + T3)

T4 - Specific credit on inputs/input services attributable exclusively to making taxable supplies, including zero-rated supplies like exports and supplies to SEZ.

C2 - Common credit C1 - T4

Now, businesses must compute the amount of ITC to be reversed out of the common credit as follows:

D1 - The ITC attributable towards exempt supplies out of common credit: (E ÷ F) × C2

Where:

E - Aggregate value of exempt supplies during the tax period

F - Total turnover in the State of the registered person during the tax period

Note: For building construction services, (E ÷ F) will be calculated on a project basis, where E stands for the aggregate carpet area of exempt construction project or apartments sold after construction is over, and F stands for the aggregate carpet area of the apartments in the project.

D2 - Deemed ITC attributable for non-business purposes out of common credit: 5% of C2

C3 - Remaining eligible ITC out of common credit: C2 - (D1 + D2)

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

Illustration:

Let's consider the following scenario for the month of July 2020 in relation to supplies made in Karnataka:

Particulars Amount (in Rs)

Total ITC available (T) 1,50,000

ITC on inputs attributable to supply used by Director for personal use (T1) 7,500

ITC on inputs to be used exclusively for making exempt supply (T2) 15,000

Blocked credits (e.g., GST portion paid for taxi service obtained) (T3) 4,500

ITC on inputs used exclusively for making taxable supplies (T4) 1,05,000

The aggregate value of exempt supplies made in July (E) 2,25,000

Total turnover in Karnataka (F) 30,00,000

Solution:

C1 = T - (T1 + T2 + T3) = 1,50,000 - (7,500 + 15,000 + 4,500) = 1,23,000

C2 = C1 - T4 = 1,23,000 - 1,05,000 = 18,000

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

D2 = 5% of C2 = 900

C3 = C2 - (D1 + D2) = 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 to the electronic credit ledger, and D1 (Rs. 1,350) and D2 (Rs. 900) needed to be reversed.

Rule 43: Reversal of ITC on capital goods

The first step is to determine 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, including zero-rated supplies.

If the ITC falls under category 'A' above, then credit will not be allowed in respect of the same. If 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 considered to be five years from the date of invoice.

This is done so that if 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'. For every quarter or part quarter for the time it was covered in category 'A' or 'B', 5% would have to be deducted from this common credit.

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

Variable used Formulae / Explanation

Tm Tc ÷ 60 Amount of ITC attributable to a tax period (a month) on common capital goods during their useful life

Tr Aggregate Tm of all those capital goods which have useful life remaining at the beginning of the tax period

Te This is the common credit attributable towards exempted supplies, which is calculated as follows: (E ÷ F) × Tr

Where:

-E: Aggregate value of exempt supplies made during the tax period

-F: Total turnover in the State of the registered person during the tax period

Note: For building construction services, (E ÷ F) will be calculated on a project basis, where E stands for the aggregate carpet area of exempt construction project or apartments sold after construction is over, and F stands for the aggregate carpet area of the apartments in the project.

Thus, Te calculated above will be the ITC in respect of capital goods that are required to be reversed 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:

Particulars Amount (in Rs)

ITC on Machine A (used exclusively in the supply of exempt goods) 1,50,000

ITC on Machine B (used exclusively in the supply of taxable goods) 9,00,000

ITC on Machine C (used exclusively for non-business purposes) 20,000

ITC on Machine D (used partly in the supply of taxable and exempt goods) 4,50,000

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

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

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

The purpose of this rule is to reverse all the ITC that has been availed by a registered person if they choose to pay tax under the composition scheme or their registration gets canceled for any reason.

The calculation is done as follows:

For inputs held in stock or contained in semi-finished and finished goods in stock, the ITC to be reversed is calculated proportionate to corresponding invoices on which credit was taken. Therefore, ITC will be allowed only until the registered person switches to the composition scheme or on cancellation of registration.

For capital goods, the ITC availed will be based on the useful life (in months) and computed on a pro-rata basis. Therefore, the ITC for the remaining useful life of the asset must be reversed when switching over to the composition scheme or on cancellation of registration.

ITC Reversal for inputs and capital goods

Rule 44A: Reversal of balance transitional ITC on 1st July 2017 for gold dore bars

This rule pertains 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 the additional duty of customs (Section 3(1) of the Customs Tariff Act, 1975), paid for the importation of gold dore bars. If stock of such gold dore bars (raw material) or gold jewelry (final product) is held by the taxpayer on 1st July 2017, the ITC will be restricted to 1/6th of the credit availed in respect of such gold dore bar.

Therefore, 5/6th of the credit availed must be reversed at the time of supply of either the gold dore bar or the gold/gold jewelry made from it.

Reporting of ITC reversal in GSTR-3B

Taxpayers themselves must calculate the amount of ITC reversal and fill it up in Table 4B of GSTR-3B. The ITC reversal 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 calculated by the taxpayer using the formula mentioned earlier and entered in this field.

'Others', where ITC reversal due to other circumstances must be reported.

Reporting of ITC reversal in GSTR-9

GSTR-9 (annual return) also needs to be filled up with details regarding ITC reversed for the entire year. Whenever possible, the details will be auto-filled based on the data entered in the monthly form GSTR-3B, but changes can be made by the taxpayer where necessary.

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

How can ClearTax help?

The process of calculating the reversal of ITC and reporting it in the relevant GST returns can be simplified by using the smart calculator feature provided by ClearTax GST while filing GSTR-9.

It downloads the entire year's data from GSTN easily to file an accurate GSTR-9 and reconciles between GSTR-1, GSTR-3B, and books of accounts to provide suggestions for fixing mismatches.

ITC Reversal under GST

Businesses can use the credit of GST paid on purchases like raw materials and services used for manufacturing or selling products, known as Input Tax Credit (ITC), while paying taxes to the Government. However, if the ITC is claimed incorrectly, it must be reversed by making the payment to that extent in the following month.

The article delves into the meaning, purpose, and cases in which ITC reversal is required.

Budget 2022 updates-

1. ITC cannot be claimed if it is restricted in GSTR-2B under Section 38.

2. The time limit to claim ITC on invoices or debit notes of a financial year is revised to the earlier of two dates: 30th November of the following year or 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 Form GSTR-2B. It lays down the manner, time, conditions, and restrictions for ITC claims. It also provides information to taxpayers about eligible and ineligible ITC for claims.

4. Section 41 is also revamped to remove references to provisional ITC claims and prescribe 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 the additional 5% 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. Therefore, taxpayers can no longer claim 5% provisional ITC under CGST Rule 36(4) and must ensure that every ITC value claimed is 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 that the credit of inputs utilized earlier will now be added to the output tax liability, nullifying the credit claimed earlier. Depending on when such reversal is done, payment of interest may also be required.

Specific conditions for ITC reversal

The Act defines various scenarios in which ITC is required to be reversed. Some of these scenarios are summarized below:

Relevant GST section/rule Circumstances When is ITC reversal required

CGST Rule 37 The recipient fails to pay consideration to the supplier (whether fully or partly) for a particular supply Within 180 days from the date of issue of the invoice.

CGST Rule 37A The supplier fails to pay tax through GSTR-3B by 30th September of the following year Before 30th November of the following financial year.

CGST Rule 38 Reversal of 50% of ITC by banking and other financial companies under special rules At the time of filing regular returns.

CGST Rule 42 Inputs used to make an exempt supply or for manufacturing supplies, some of which were used for non-business or personal purposes On a periodic basis (monthly/yearly) using a formula given below for common credits.

CGST Rule 43 Capital goods used to make an exempt supply or for manufacturing supplies, some of which were used for non-business or personal purposes On a periodic basis (monthly/yearly) using a formula given below for common credits.

CGST Rule 44 Cancellation of GST registration or switching to the composition scheme While filing form REG-16 under various situations explained in detail in our article on the cancellation of GST registration or through ITC-03 while opting for the composition scheme.

CGST Rule 44A Reversal of 5/6th of the ITC taken on gold dore bars in stock as on 1st July 2017 At the time of supply of either the gold dore bar or the gold/gold jewelry.

Section 16(3) Depreciation under the Income Tax Act has been claimed on the GST component of capital goods purchased Reversal is required at the time of closing books of accounts for that financial year.

CGST Section 17(5) ITC has been availed on 'blocked credits' At the time of filing regular returns up to the date of filing annual returns.

CGST Section 17(5)(h) Inputs used in goods that were lost, destroyed, stolen, etc. At the time of filing the regular returns in relation to the month in which such loss occurred.

CGST Section 17(5)(h) Inputs used in goods that were given out as free samples At the time of filing the regular returns in relation to the month in which such free samples were given out.

Unblock working capital with 100% input tax credit claims

Calculation of ITC under various rules

Let's examine 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 attributed to a supply - either taxable, non-taxable, or supply consumed for personal use.

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

The amount of ITC that is directly attributable to a particular taxable supply can be utilized and is available in the electronic credit ledger.

Taxpayers must reverse the amount of ITC directly attributable to a particular supply that is non-taxable or used for personal consumption, but only when wrongly availed.

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

Treatment:

Taxpayers must identify and reverse the proportionate ITC amount to the extent of supplies that are non-taxable or used for personal consumption.

The remaining ITC is eligible for the claim.

Rule 42 and 43: ITC reversal on 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. This can be done by using the following formulas:

T - Total input tax paid credit on inputs and input services

T1 - Out of 'T', the specific credit attributable to inputs/input services intended to be used for non-business purposes

T2 - Out of 'T', the amount of input tax attributable to inputs/input services intended to be used exclusively for effecting exempt supplies

T3 - Out of 'T', the amount of input tax deemed as 'blocked credits' under Section 17(5)

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:

C1 - ITC credited to the electronic credit ledger T - (T1 + T2 + T3)

T4 - Specific credit on inputs/input services attributable exclusively to making taxable supplies, including zero-rated supplies like exports and supplies to SEZ.

C2 - Common credit C1 - T4

Now, businesses must compute the amount of ITC to be reversed out of the common credit as follows:

D1 - The ITC attributable towards exempt supplies out of common credit: (E ÷ F) × C2

Where:

E - Aggregate value of exempt supplies during the tax period

F - Total turnover in the State of the registered person during the tax period

Note: For building construction services, (E ÷ F) will be calculated on a project basis, where E stands for the aggregate carpet area of exempt construction project or apartments sold after construction is over, and F stands for the aggregate carpet area of the apartments in the project.

D2 - Deemed ITC attributable for non-business purposes out of common credit: 5% of C2

C3 - Remaining eligible ITC out of common credit: C2 - (D1 + D2)

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

Illustration:

Let's consider the following scenario for the month of July 2020 in relation to supplies made in Karnataka:

Particulars Amount (in Rs)

Total ITC available (T) 1,50,000

ITC on inputs attributable to supply used by Director for personal use (T1) 7,500

ITC on inputs to be used exclusively for making exempt supply (T2) 15,000

Blocked credits (e.g., GST portion paid for taxi service obtained) (T3) 4,500

ITC on inputs used exclusively for making taxable supplies (T4) 1,05,000

The aggregate value of exempt supplies made in July (E) 2,25,000

Total turnover in Karnataka (F) 30,00,000

Solution:

C1 = T - (T1 + T2 + T3) = 1,50,000 - (7,500 + 15,000 + 4,500) = 1,23,000

C2 = C1 - T4 = 1,23,000 - 1,05,000 = 18,000

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

D2 = 5% of C2 = 900

C3 = C2 - (D1 + D2) = 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 to the electronic credit ledger, and D1 (Rs. 1,350) and D2 (Rs. 900) needed to be reversed.

Rule 43: Reversal of ITC on capital goods

The first step is to determine 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, including zero-rated supplies.

If the ITC falls under category 'A' above, then credit will not be allowed in respect of the same. If 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 considered to be five years from the date of invoice.

This is done so that if 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'. For every quarter or part quarter for the time it was covered in category 'A' or 'B', 5% would have to be deducted from this common credit.

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

Variable used Formulae / Explanation

Tm Tc ÷ 60 Amount of ITC attributable to a tax period (a month) on common capital goods during their useful life

Tr Aggregate Tm of all those capital goods which have useful life remaining at the beginning of the tax period

Te This is the common credit attributable towards exempted supplies, which is calculated as follows: (E ÷ F) × Tr

Where:

-E: Aggregate value of exempt supplies made during the tax period

-F: Total turnover in the State of the registered person during the tax period

Note: For building construction services, (E ÷ F) will be calculated on a project basis, where E stands for the aggregate carpet area of exempt construction project or apartments sold after construction is over, and F stands for the aggregate carpet area of the apartments in the project.

Thus, Te calculated above will be the ITC in respect of capital goods that are required to be reversed 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:

Particulars Amount (in Rs)

ITC on Machine A (used exclusively in the supply of exempt goods) 1,50,000

ITC on Machine B (used exclusively in the supply of taxable goods) 9,00,000

ITC on Machine C (used exclusively for non-business purposes) 20,000

ITC on Machine D (used partly in the supply of taxable and exempt goods) 4,50,000

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

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

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

The purpose of this rule is to reverse all the ITC that has been availed by a registered person if they choose to pay tax under the composition scheme or their registration gets canceled for any reason.

The calculation is done as follows:

For inputs held in stock or contained in semi-finished and finished goods in stock, the ITC to be reversed is calculated proportionate to corresponding invoices on which credit was taken. Therefore, ITC will be allowed only until the registered person switches to the composition scheme or on cancellation of registration.

For capital goods, the ITC availed will be based on the useful life (in months) and computed on a pro-rata basis. Therefore, the ITC for the remaining useful life of the asset must be reversed when switching over to the composition scheme or on cancellation of registration.

ITC Reversal for inputs and capital goods

Rule 44A: Reversal of balance transitional ITC on 1st July 2017 for gold dore bars

This rule pertains 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 the additional duty of customs (Section 3(1) of the Customs Tariff Act, 1975), paid for the importation of gold dore bars. If stock of such gold dore bars (raw material) or gold jewelry (final product) is held by the taxpayer on 1st July 2017, the ITC will be restricted to 1/6th of the credit availed in respect of such gold dore bar.

Therefore, 5/6th of the credit availed must be reversed at the time of supply of either the gold dore bar or the gold/gold jewelry made from it.

Reporting of ITC reversal in GSTR-3B

Taxpayers themselves must calculate the amount of ITC reversal and fill it up in Table 4B of GSTR-3B. The ITC reversal 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 calculated by the taxpayer using the formula mentioned earlier and entered in this field.

'Others', where ITC reversal due to other circumstances must be reported.

Reporting of ITC reversal in GSTR-9

GSTR-9 (annual return) also needs to be filled up with details regarding ITC reversed for the entire year. Whenever possible, the details will be auto-filled based on the data entered in the monthly form GSTR-3B, but changes can be made by the taxpayer where necessary.

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

How can ClearTax help?

The process of calculating the reversal of ITC and reporting it in the relevant GST returns can be simplified by using the smart calculator feature provided by ClearTax GST while filing GSTR-9.

It downloads the entire year's data from GSTN easily to file an accurate GSTR-9 and reconciles between GSTR-1, GSTR-3B, and books of accounts to provide suggestions for fixing mismatches.

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