Rule 42 and 43 Input credit reversal

[SANJAY JAIN]

Whether Interest income and schedule III supply will be considered as exempt supply for the purpose of reversal of common input credit under Rule 42 and Rule 43.

Thanks and Regards,

Sanjay Jain

[KASTURI SETHI]

(i) Activities or transactions mentioned in Schedule-III (Section 7 of CGST Act, 2017) are neither supply of goods nor supply of services. Hence these are out of scope (jurisdiction) of GST. These cannot fall under,"exempt supply" as defined under Section 2 (47) of CGST Act, 2017. Before terming any activity or transaction as exempt supply or non-taxable supply or taxable supply (whatever the case may be) it must conform to the definition/scope of "supply" . In GST Acts, taxable event is supply and when there is "no supply", there is no question of exempted supply or taxable supply or non-taxable supply. We should talk about exemption/taxability/non-taxability only when it is supply. Hence activities mentioned in Schedule-III cannot be considered as exempt supplies for the purpose of reversal of ITC.

(ii) Every type of interest is not to be treated as exempt supply for the purpose of reversal of ITC. Only interest earned (in a normal routine) on account of taxable business is to be treated as exempt supply for the said purpose.

[SANJAY JAIN]

Dear Kasturiji,

Thanks for your quick response. There are some supply in Schedule III which is to be considered as exempt supply for reversal of input tax credit such as: sale of land and building, sale of securities etc (as per section 17(5) of the CGST Act). Hence there is scope of litigation if we do not reverse the common input tax credit on high sea sale treating as exempt supply.

As per exemption notifications, service by way of interest on the deposit is exempt supply, whether we have to consider the same as exempt supply for the purpose of section 42. Can you please provide relevant notification/ rules.

Thanks and Regards,

Sanjay Jain

[KASTURI SETHI]

Sale of land, sale of building mentioned in Schedule -III is subject to Schedule-II (Paragraph-5).

[CASusheel Gupta]

Sir as per Explanation 1 to Rule 43 -

Exempt supply shall exclude interest income.

As such for reversal as per rule 42 and 43, interest income shall be excluded from exempt supply.

Thanks and regards

CA Susheel Gupta

9811004443

[KASTURI SETHI]

Sh.Susheel Gupta Ji,

Yes. Sir. I agree with you. Interest is to be excluded.

[SANJAY JAIN]

Thanks Susheelji and Kasturiji for your reply.

I want to further discuss why no supply as per Schedule III should be included in exempt supply for the purpose of section 42:

Exempt supply is defined under section 2(47) “exempt supply” means 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;

Hence exempt supply also includes non taxable supply also. Non taxable supply has been defined in section 2(78) as belows:

(78) “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act;

Since schedule III items are no supply, the department may take a view it is non taxable supply and included in exempt supply. Is there any explanation wherein schedule III supply are excluded for the purpose of Rule 42 and Rule 43.

Thanks and Regards,

Sanjay Jain

[CASusheel Gupta]

Kasturi Sir has rightly stated that first it has to be supply then it can become exempt supply.

Schedule III activities shall not be included in exempt supply

Liquor, petrol, diesel are products which are classifiable as Non Taxable products and shall partake exempt supply

Thanks and Regards

[KASTURI SETHI]

Dear Querist,

The department cannot take such view as apprehended by you. The Department cannot brush aside the constitution of India. Schedule-III is part of the Act. No-supplies have been defined in this Schedule. It is not a circular or FAQ which have no statutory force. For your satisfaction, there is a world of difference among the words/terms "Supply", "No supply", "Taxable supply" "Non-taxable Supply" "Exempt supply". It is correct that non-taxable supply is part of "exempt supply" but no-supply cannot part of exempt supply. No-supply means supply does not exist. Taxable event is supply. When supply does not exist, how it can be part of exempt supply ? Any thing which has no existence, how can it be part of any thing ? First of all existence (of supply) is required. Thereafter, you should talk of making it part of anything (exempt supply).

You are not to worry. If you still worry, I shall call it phobia of the department. Phobia means fear which does not exist.

[SANJAY JAIN]

Dear Kasturiji,

I agree with your view, but there is controversy created by CBIC notification no 74/2018 CT dated 31st December 2018. In the annual return form section 5F, they have mentioned that Non GST Supply also includes no supply also.

Regards,

Sanjay Jain

[KASTURI SETHI]

Sh.Sanjay Jain Ji,

You have mentioned Section F of Annual Return against which it is mentioned that non-GST supply includes no supply. You must note that there are separate columns for exempted (D), Zero rated, nil rated etc. in this return against Section 5. It clearly shows that exempted supply is treated separately. Non-GST supply or no-supply both are out of network of GST. No difference between both. Check all the return forms and you will find that 'exempted supply' is always different from non-GST Supply/No-supply, nil rated supply, zero-rated supply.

[KASTURI SETHI]

We cannot interpret dictionary meaning in our own way. When we deal in non-GST supply/no supply, not to speak of reversal of ITC, GST law cannot touch it (supply). Even nil rate of duty is also a rate of duty as held by the Supreme Court. All exempted supplies are taxable supplies, these are exempt supplies only by virtue of any notification.

[KASTURI SETHI]

It appears to me that the intention behind creating columns of 'non-GST supply', NIl rated supply, zero rated supply, exempt supply in various prescribed returns by the Govt. is that some person may not avail exemption from GST wrongly by way of misclassification of goods or services knowingly or unknowingly. GST law is still in its infancy and mistakes are bound to happen. Now first focus/emphasis of Audit will be on these above supplies declared by the registered persons in theirs returns. So I advise all visitors of this forum to be careful in their interest as well as nation's interest while declaring above supplies in their returns..

[SANJAY JAIN]

Thanks Kasturiji for your reply.

Regards,

Sanjay Jain

[CSSANJAY MALHOTRA]

ITC Reversal is not required to be made for Interest received on Loans/ Advances/ Deposits except in case of Banking Company. The same is not part of Exempt Supply as clarified in Explanation I to Rule 43 of CGST Rules 2017.

Further, Explanation to Section 17(3) as inserted from 01.02.2019 prescribes for non inclusion of value of transactions specified in Schedule III of Supply except those specified in Paragraph 5 of the said schedule. Schedule are No Supply Turnover and part of Non GST Turnover.

[CSSANJAY MALHOTRA]

Read Last Para as under:

Further, Explanation to Section 17(3) as inserted from 01.02.2019 prescribes for non inclusion of value of transactions specified in Schedule III of Supply while considering the value for EXEMPT SUPPLY except those specified in Paragraph 5 of the said schedule. Schedule-III refers to "No Supply" Transactions and are further part of Non-Taxable Turnover.

[Nandan Khambete]

Amendment applicable from 1.2.19. So reversal is applicable till 31.1.19.

[Nandan Khambete]

Small correction.It is still exempt supply. But Interest income will be considered for reversal upto 22.01.2018 only.