Calculation procedure of ITC reversal u/s 17(2) of CGST Act,2017

Many business organizations engage in providing taxable supplies (supplies on which GST is charged by the organization as per the provisions of GST Act), and exempt supplies (supplies on which no GST is charged as per the relevant provisions of GST Act), to its various customers. 

While providing such supplies, they incur various expenditures in the form of Selling expenses (like Advertisement, Public relation services etc.), Administrative expenses (like Audit fees, office expenses, Security and Manpower services, Consultancy fees, Rent, etc.) and other expenses on which Goods and Services Tax (GST) is charged by such vendor in the ordinary course of business. 

As per Section 16 of the CGST Act, 2017, a taxable person is eligible to claim input tax credit on various expenditures incurred in the course of business, subject to conditions prescribed in the Section 16 itself and Section 17(5) of the CGST Act. Therefore, we can safely conclude that a registered taxable person can claim Input tax credit (ITC) of most of the expenditures.

However, As per Section 17(2) of the CGST Act 2017,  Where the goods or services or both are used by the registered person partly for effecting taxable suppliesincluding zero-rated supplies (exports) 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.

Here, in the above section, law makers restrict the amount of GST credit only to supplies which are liable to GST (i.e. taxable supplies), because a registered taxable person does not charge GST on exempt supplies, and GST input tax credit must be apportioned between taxable supplies and exempt supplies

Now, a big question arises, how to calculate the ITC amount which needs to be reversed on such exempt supplies.

1) Situation-1:  When GST input tax credit is separately identified for taxable supplies and exempt supplies

For example, A society (similar to ICAI- which conducts various events for the benefit of members, conducts examination for students, charging membership fees from its members), which is registered under GST act, supplies following services and raises the invoice of the same,

a) Membership subscription: Rs. 100,000 (GST being Rs. 18,000)

b)  Advertisement in print media: ₹ 50,000 (GST being ₹ 2,500)

c) Registration fees for various events: ₹ 200,000 (GST being ₹ 36,000)

e) Exempt sales (like examination fees, student registration fees): ₹ 25,000

the above mentioned incomes are liable to GST (except exempt sales)

Lets us assume that membership subscription, advertisement in print media, registration fees are handled by Department X, which incurred expenditure of ₹ 500,000 (GST being ₹ 90,000), and Income from exempt sales are handled by Department Y, which incurred expenditure of ₹ 100,000 (GST being. ₹ 18,000).

In the above case, we can only claim ₹ 90,000, as GST Input tax credit for the concerned month, and ₹ 18,000 (which is incurred by Department Y) shall lapse.

1) Situation-2:  When GST input tax credit cannot be separately identified (common input tax credit) for taxable supplies and exempt supplies.

Some of the examples of common Input tax credit are telephone expenses, audit fees, consultancy fees, manpower services, advertising services etc.

Lets take an example similar in Situation-1

A society (similar to ICAI- which conducts various events for the benefit of members, conducts examination for students, charging membership fees from its members), which is registered under GST act, supplies following services and raises the invoice of the same,

a) Membership subscription: Rs. 100,000 (GST being Rs. 18,000)

b)  Advertisement in print media: ₹ 50,000 (GST being ₹ 2,500)

c) Registration fees for various events: ₹ 200,000 (GST being ₹ 36,000)

e) Exempt sales (like examination fees, student registration fees): ₹ 25,000

f) Sponsorship Income - ₹ 75,000 (GST to be paid by sponsorer)

the above mentioned incomes are liable to GST (except exempt sales)

Lets us assume that membership subscription, advertisement in print media, registration fees, and exempt sales are handled by Department X, which incurred expenditure of ₹ 55556 (GST being ₹ 10,000- eligible input only).

Note: The amount of GST input tax credit which is to be reversed shall be equal to total input tax credit less ineligible input tax credit

In the above example, The society shall reverse the GST input on exempt supplies (₹ 25,000) and Sponsorship Income (₹ 75,000).

The calculation procedure is as follows,

a) Total Turnover u/s 2(112) of CGST Act, 2017 = ₹ 450,000 (Membership subscription + Advertisement in print media + Registration fees + Sponsorship income + exempt supplies) (A)

b)  Total GST input tax credit of ₹ 10,000 (B)

c) Total exempt supplies and Sponsorship income = ₹ 100,000 (C)

d) Proportionate GST input to be reversed on account of exempt supplies and Sponsorship  Income

Step 1: (B * C)/A
Step 2: (10,000 * 100,000)/450,000
Step 3: ₹ 2,222 (Input should be blocked)
Step 4: The society shall be eligible to claim net GST Input tax credit of ₹ 7,778 (₹ 10,000 – 2,222).