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.

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.