ITC reversal sec.(42) or not.

[Yash Jain]

We are engaged in Raw Cotton Ginning Pressing and Cotton Seed oil mill factory.

We buy Raw Cotton From farmers and are required to pay RCM. (RCM was suspended but Raw cotton RCM was started again as per notif. 43/2017 - central tax (rate) - 14-11-2017.

The output Products are cotton bales - Taxable @5% and Cotton Seed @5%.

Cotton Seed is sold to oil Mill. We have our own mill. After crushing output products are oil@5% and

Cotton seed oil cake ( cattle feed) - Tax free (as per notification 27/2017 dt. 22-09-2017.

Now the question is, are we people liable to do reversal of itc under section 42(3) of RCM ITC and other ITC on monthly basis or we do not need to reversal.

People are having different opinion. It is said that we not liable to do reversal.

Some say it is Tax free supply - so no reversal needed.

Some say it is Non GST supply - so no reversal needed.

Some say it is NIL rated supply - so no reversal needed.

Few are saying that they will claim refund after filing annual return GSTR 9.

Please clarify this matter as CA's are also divided on this issue.

[SHARAD ANADA]

Reversal is required as per sec 17(2) of CGST ACT 2017. Sec 17(2) is reproduced here under (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.

Also refer Rule 42 (reversal for input and input services) and Rule 43 (reversal of capital goods) of CGST Rule 2017

[SHARAD ANADA]

Cotton seed oil cake is Nil rated supply and not Non GST supply. Nil rated supply under GST is covered under definition of exempt supply. Refer sec 2(47)

(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.

You are not eligible for refund of unutilized ITC u/s 54

[KASTURI SETHI]

Yes. Reversal is required. Non-GST supply is not in picture here.

[Ganeshan Kalyani]

The reversal is required as required under section 17.

[Yash Jain]

Thank you everyone for prompt reply.

Two more queries regarding section 42.

1. according to rule, reversal is required each month and interest for short reversal is calculated from next fy 1apr. If we do whole year reversal in March only, will we invite interest penalty month wise.??

2. In case reversal is done excess, we need to claim refund. What docs will be required for it, like audit report/ gstr 9 / 9c.

AI Summary

Input tax credit reversal required where supplies include nil rated exempt outputs; monthly reversal may attract interest. Input tax credit must be proportionately reversed where inputs are used for both taxable and exempt (including nil rated) supplies under section 17(2); Rule 42 governs reversal for inputs and input services and Rule 43 for capital goods. Cotton seed oil cake classified as nil rated constitutes an exempt supply, bringing it into the reversal computation. Purchases under reverse charge are included. Unutilized ITC attributable to exempt supplies is not eligible for refund under the cited refund provision; periodic reversal timing affects interest exposure and excess reversal requires return/audit documentation for remedial claims.