ITC reversal under GST, covering essential rules, calculation methods, applicable penalties, and the powers of GST officers etc can be obtained from Udaipur’s top Chartered Accountants or Expert GST Consultant.
Introduction
Input Tax Credit (ITC) is a cornerstone of the GST framework, enabling businesses to reduce their tax liability on outward supplies. However, availing ITC comes with strict conditions, and non-compliance can result in reversal along with interest and penalties. In this article, Consultants with respect to input credit or Udaipur’s leading Chartered Accountants and GST consultants explain the key scenarios that trigger ITC reversal, outline the applicable rules and regulations, and highlight penalties for improper claims. The discussion is enriched with a detailed case study and practical examples for better understanding and compliance.
Situations Leading to ITC Reversal
- Non-payment of Invoices Within 180 Days
- As per Rule 37 of the CGST Rules, ITC claimed on an invoice must be reversed if payment to the supplier is not made within 180 days from the date of issuance.
- Inputs Partly for Business and Partly for Personal Use
- ITC must be reversed proportionately for the portion of inputs used for non-business or personal purposes as per Rule 42 of the CGST Rules.
- Inputs Used for Exempt Supplies
- ITC pertaining to inputs used in exempt supplies is ineligible and must be reversed under Rule 42 of the CGST Rules.
- Capital Goods Partly for Business and Partly for Non-Business Use
- Similar to inputs, ITC on capital goods used for both business and non-business purposes requires proportionate reversal under Rule 43 of the CGST Rules.
- Inadequate ITC Reversal Identified Post Annual Return
- If the ITC reversed during the year is less than the required amount, the differential amount must be added to the output tax liability as per Section 50 of the CGST Act. Interest is applicable on the unpaid tax.
Legal Provisions
- Section 16 of the CGST Act
- Details conditions for availing ITC.
- Section 17 of the CGST Act
- Covers restrictions on ITC for personal use and exempt supplies.
- Section 50 of the CGST Act
- Provides for interest on delayed payment of taxes, including ITC reversal.
- Rule 42 and Rule 43 of the CGST Rules
- Prescribe methods for apportioning ITC between taxable and exempt supplies and for personal use.
- Rule 37 of the CGST Rules
- Mandates ITC reversal for invoices unpaid within 180 days.
Each section wise provisions in details:-
- Section 16 of the CGST Act, 2017
Eligibility and Conditions for Taking Input Tax Credit (ITC):
- Eligibility for ITC: Every registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him, which are used or intended to be used in the course or furtherance of his business.
- Conditions for Availing ITC:
(a) The recipient must possess a tax invoice or debit note issued by a supplier registered under the Act.
(b) The recipient must have received the goods or services.
(c) Tax charged on the supply must have been paid to the government, either in cash or through the utilization of input tax credit admissible for such payment.
(d) The recipient must have furnished the return under Section 39.
- Restriction for Non-payment: If the recipient fails to pay the supplier the amount towards the value of supply and tax within 180 days from the invoice date, the ITC availed shall be added to the recipient’s output tax liability along with interest.
2. Section 17 of the CGST Act, 2017
Apportionment of ITC and Blocked Credits:
- Apportionment of ITC:
(a) ITC is available only to the extent of taxable supplies, including zero-rated supplies.
(b) ITC on inputs or input services attributable to exempt supplies and personal use shall not be available.
- Blocked Credits: Certain categories of ITC are restricted, such as:
(i) Motor vehicles for personal use.
(ii) Membership of a club, health, and fitness center.
(iii) Goods or services used for personal consumption.
(iv) Goods lost, stolen, destroyed, or disposed of as gifts or free samples.
3. Section 50 of the CGST Act, 2017
Interest on Delayed Payment of Tax:
- Liability to Pay Interest: A registered person who fails to pay the tax due under this Act within the prescribed time shall pay interest at such rate as may be notified (not exceeding 18%).
- Interest on ITC Reversal: If ITC has been availed and utilized improperly, interest must be paid on the amount of ITC reversed.
- Applicable Rate of Interest:
(a) Interest at 18% is levied on delayed payment of tax.
(b) Interest at 24% is levied on undue or excess claim of ITC or reduction in tax liability.
4. Rule 42 and Rule 43 of the CGST Rules, 2017
Apportionment of ITC:
- Rule 42: Apportionment of ITC for Inputs and Input Services:
(a) ITC attributable to exempt supplies or personal use shall be reversed as per the formula prescribed in the rule.
(b) The formula for ITC reversal includes:
– T: Total ITC on inputs/input services.
– T1: ITC exclusively attributable to exempt supplies.
– T2: ITC exclusively attributable to non-business purposes.
– T3: ITC attributable to business and taxable supplies.
(c) Monthly reversal of ITC must be calculated, and adjustments are required at the end of the financial year.
- Rule 43: Apportionment for Capital Goods:
(a) ITC on capital goods is allocated over 60 months.
(b) ITC attributable to exempt supplies or non-business purposes must be reversed proportionately.
5. Rule 37 of the CGST Rules, 2017
Reversal of ITC for Non-payment of Consideration:
- Mandate for Reversal: Where the recipient fails to pay the supplier the value of supply along with tax within 180 days from the date of issue of invoice, ITC availed on such invoices must be reversed.
- Interest Payable: Such reversal is liable to interest under Section 50.
- Re-claiming ITC: The recipient may re-avail ITC on subsequent payment of the consideration along with tax to the supplier.
Consequences of Non-Compliance
- Additional Tax Liability
- Non-reversed ITC is added to the output tax liability.
- Interest on Unpaid Tax
- Interest is charged at 18% per annum under Section 50 of the CGST Act.
- Penalties
- Penalty up to 10% of the tax amount or ₹10,000 (whichever is higher) may be imposed under Section 122 of the CGST Act.
- Prosecution for Wilful Misstatement
- Severe cases may lead to prosecution under Section 132 of the CGST Act.
Powers of GST Officers
- Inspection and Audit
- GST officers can audit books of accounts to verify ITC claims.
- Demand and Recovery
- Officers can issue demand notices for ITC irregularities under Section 73 (non-fraud cases) or Section 74 (fraud cases).
- Interest and Penalty Imposition
- Officers have the authority to impose interest and penalties under applicable sections.
- Attachment of Property
- Under Section 83 of the CGST Act, officers can provisionally attach property to protect revenue.
Case Study
Scenario: ABC Pvt. Ltd., a registered taxable person under GST, purchased inputs worth ₹10,00,000 in FY 2023-24. Out of these inputs, ₹2,00,000 worth of goods were used for exempt supplies and ₹1,00,000 for personal use.
ITC Claimed: Total ITC on purchases = ₹1,80,000 (assuming an 18% GST rate).
Reversal Calculation:
- ITC for exempt supplies: ₹2,00,000 × 18% = ₹36,000.
- ITC for personal use: ₹1,00,000 × 18% = ₹18,000.
Total ITC to be Reversed: ₹36,000 + ₹18,000 = ₹54,000.
ABC Pvt. Ltd. must reverse ₹54,000 in ITC while filing its returns.
Practical Example
Situation: XYZ Ltd. claimed ITC of ₹1,00,000 on inputs purchased in April 2023. By October 2023, ₹50,000 worth of invoices remain unpaid.
Action Required:
- Reversal under Rule 37: ITC on unpaid invoices = ₹50,000 × 18% = ₹9,000.
- Add ₹9,000 to output liability in GSTR-3B of October 2023.
- Pay interest from July to October (4 months): ₹9,000 × 18% × 4/12 = ₹540.
Conclusion
Reversal of Input Tax Credit (ITC) is a vital compliance requirement under GST, and businesses must adopt a meticulous approach to ensure adherence. Maintaining accurate records, conducting periodic account reconciliations, and filing GST returns within the prescribed timelines are essential to avoid potential financial liabilities and legal challenges. A clear understanding of ITC-related provisions, coupled with proactive compliance measures, not only ensures seamless GST adherence but also safeguards businesses from unnecessary disputes and penalties. GST consultants or Udaipur’s top Chartered Accountants can provide invaluable support in navigating these complexities effectively in this regard.