Query regarding common ITC reversal

[KARAN VERMA]

Sir, in case of sugar mill, assessee has sold sugar, molasses both are taxable supply but assesse has purchase boiler/turbine for generation of power and from this 50% power will be sold to outside and 50% will be captive consumed for manufacturing of sugar.

Now, my question is assessee has to reverse ITC on boiler/turbine on proportionate basis, then what will be base.

Assume- power sale to outside is ₹ 10 crores which is exempt and sugar/molasses sale is ₹ 150 crores. And ITC related to power plant is ₹ 25 crores.

Option-1 Reversal of ITC= (Total exempt sale/Total sale * ITC) = (10/160*25) = ₹ 1.56 crores or

Option-2 Reversal of ITC= 50% of ₹ 25 crores = ₹ 12.5 crores because power sale 50 % sold to outside and 50 % use for sugar manufacturing.

Kindly clarify which option is true.

[Spudarjunan S]

Dear Sir,

In GST regime, when a taxable person has both taxable and exempt supplies, ITC would be allowed only to the extent of taxable supply and ITC in relation to exempt supply would be restricted - Section 17(2) of CGST Act, 2017 read with rule 42 & 43 of CGST Rules, 2017.

[KARAN VERMA]

yes sir, true I Know this, but i want to know which option of reversal is correct as per mentioned above.

[Spudarjunan S]

Being the power plant is used for providing both taxable(Supply of Sugar) and exempt supplies(Supply of Electricity), your option 1 would be resembling to the reversal procedure as prescribed under Rule 42.

[HariKishan Bhonagiri]

I think it Rule 43

[Spudarjunan S]

Yes, incase of inputs, input services rule 42 has be applied.

In case of capital goods, rule 43 has to be applied.

Your provided option 1, resembles for rule 42 reversal, in case of capital goods you have to follow rule 43 which is entirely different calculation.

[SIVARAMA KUMAR]

Since you wish to reverse the ITC on capital goods related to exempt & taxable supplies option 1 suggested by you does not apply ( It applies only for reversal of revenue items)

Common credit mechanism applies for capital goods and hence the value of ITC shall be reckoned for a period of 60 months (Life expectancy of the asset as specified under the act) when you carry out exempt and taxable supplies simultaneously .

Your eligible Common Credit ITC would be 25 crores/60 months= ₹ 41,66,667 per month.(Assuming you have not put the asset previously for exempt supply from the date of its purchase else 5% reversal is mandatory)

Your proportionate reversal would be 41,66,667/160*10=2,56,250/- needs to be reversed based on the total exempted turnover / total turnover on a month on month basis.

AI Summary

Clarification on ITC reversal for sugar mills: Apply Sections 17(2), Rules 42 & 43 of CGST Act, 2017 for capital goods. A discussion on a forum addressed the issue of Input Tax Credit (ITC) reversal for a sugar mill that uses a boiler/turbine for power generation, with 50% of the power sold externally and 50% used internally. The query sought clarity on the correct method for ITC reversal: proportionate to exempt sales or based on the power used. Respondents discussed the application of GST rules, specifically Sections 17(2) and Rules 42 and 43 of the CGST Act, 2017. It was concluded that for capital goods, a common credit mechanism applies, requiring a 60-month period calculation for ITC reversal.