Reversal of ITC u/r 42

[kanwaljeet singh]

Respected members,

I had a doubt regarding reversal of ITC o n cotton seed used for manufacturing of cotton seed cake(exempt) and cotton seed oil(taxable @5%), first doubt is that in this case will I have to apply rule 42 or I can simply take 90% of itc on cotton seed as for exempt supply( cotton seed cake production ratio) and balance 10% as itc for taxable supply(oil ratio)

And secondly if I had to apply rule 42, then in that case if In a particular tax period i had not sold oil i,e no taxable sales, just sale of exempted cotton seed cake, then my entire itc on cotton seed for that month has to be reversed as per rule 42 since in that case my exempt sales shall be total sales

Please reply

[KASTURI SETHI]

Dear Sh.Naveen Kumar Ji,

Yes. I agree with you but dues to fluctuations the accuracy can be evolved only on the basis of one year as suggested by Sh.Ganeshan Kalyani Ji.

Yes sir. but that is how rules are framed.

Simply we have to follow.

[Mandar Sathe]

Dear Sir

The assessment of tax/reversal of credit is to be done month wise. This the formula provided in Rule 42 is to be applied using the figures of the month of assessment. I do understand that this will cause some difficulty if you have purchases in a month and no taxable sale in the said month.

You do have an option not to avail the credit in the month when there is no taxable supply and avail the same in the subsequent month.

Having said that one has to be aware that Rule 42(2) provides that at the end of the year an annual calculation is also required to be done and any excess credit availed has to be reverted or re-credit can be taken of excess reversal based on the annual calculation. Technically the values of previous year can not be taken as a bench mark. (the provisions of Rule 42 under CGST Act are different for the concept of Rule 6(3) of the CENVAT credit Rules)

AI Summary

Reversal of input tax credit must follow turnover-based monthly allocation with annual adjustment, using prior-period figures if no taxable sales.
ITC used for both exempt and taxable supplies must be reversed on a turnover basis for each tax period rather than by production ratio. Monthly reversals use that period's exempt turnover, with the preceding period's turnover applied if there are no sales. An annual computation reconciles monthly reversals and permits correction of excess availing or excess reversal when accounts are finalised.