Input Tax credit rule when inputs or input service are used both for effecting taxable as well exempt supply?
As per section 17(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. In other words, credit of input tax Shall be restricted to ITC attributable to taxable Supply & zero rated supply
Meaning of exempt supply: As per section 17(3)
The value of exempt supply under sub-section (2) shall be such as may be prescribed and shall include supplies on which the recipient is liable to pay tax on a reverse charge basis, transactions in securities, sale of land, and, subject to clause (b) of paragraph 5 of Schedule II, sale of a building.
[Explanation.-For the purposes of this sub-section, the expression “‘value of exempt supply” shall not include the value of activities or transactions specified in Schedule III,
Except,-
(i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and
(ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule.
In other words, schedule III transaction outward supply shall not be treated as exempt Supply for reversal of proportionate common input tax credit except item listed in Sl. no No-5 & 8(a) of schedule III.
Schedule- III
- Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. Sale of Land or building (except where advance received before completion or first occupant ) treated as exempt supply for availing ITC on common ITC.
8 (a) Supply of warehoused goods to any person before clearance for home consumption;
In other words for reversal of common credits under section 17(2) exempt supply shall be:
- exempt supply
- outwards supply covered under RCM where recipient is liable to pay GST
- transactions in securities
- sale of land and
- sale of a building except wore advance received before completion Certificate Sl. no.5 of schedule III
- Supply of warehoused goods to any person before clearance for home consumption;Sl. no.8 of schedule III
meaning of exempt supply:“Exempt supply” means a supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply; section 2(47)
meaning of taxable supply:”taxable supply” means a supply of goods or services or both which is leviable to tax under this Act; section 2(108)
Rule 42 has a provision to compute lTC attributable to taxable supply, and therefore any Credit of lTC availed to be reversed or to be paid from the E-Cash ledger
Rule 42 Manner of determination of input tax credit in respect of inputs or input services and reversal thereof
(1) The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-
(a) the total input tax involved on inputs and input services in a tax period, be denoted as ‘T’;
(b) the amount of input tax, out of ‘T’, attributable to inputs and input services intended to be used exclusively for other than business purposes, be denoted as ‘T1′;
(c) the amount of input tax, out of ‘T’, attributable to inputs and input services intended to be used exclusively for effecting exempt supplies, be denoted as ‘T2′;
(d) the amount of input tax, out of ‘T’, in respect of inputs and input services on which credit is not available under sub-section (5) of section 17, be denoted as ‘T3′;
(e) the amount of input tax credit credited to the electronic credit ledger of registered person, be denoted as ‘C1′ and calculated as-
C1 = T- (T1+T2+T3);
(f) the amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero-rated supplies, be denoted as ‘T4′;
[Explanation: For the purpose of this clause, it is hereby clarified that in case of supply of services covered by clause (b) of paragraph 5 of Schedule II of the said Act, value of T4 shall be zero during the construction phase because inputs and input services will be commonly used for construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the project, whichever is earlier, and those which are not booked by the said date.]37
(g) ‘T1′, ‘T2′, ‘T3′ and ‘T4′ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2 and at summary level in FORM GSTR-3B;
(h) input tax credit left after attribution of input tax credit under clause [(f)] shall be called common credit, be denoted as ‘C2′ and calculated as-
C2 = C1- T4;
(i) the amount of input tax credit attributable towards exempt supplies, be denoted as ‘D1′ and calculated as-
D1= (E÷F) × C2
where,
‘E’ is the aggregate value of exempt supplies during the tax period, and
‘F’ is the total turnover in the State of the registered person during the tax period:
Therefore, the amount of D1 shall be attributable to exempt supply from the common input tax credit to be reversed, besides not availing ITC of Block credit, not for business Purpose and Credit directly attributable to exempt supply.
