Reversal under Rule 42

[Rajesh Kumar]

Sir/madam

if a supplier of FMCG products most of which are taxable except some goods like unbranded rice sells his goods. Should he reverse the ITC in respect of sell against exempted supply? Or he can say that as the purchase of said exempted goods is itself without ITC, accordingly he sells without passing ITC . So there is no involvement of ITC therefore no reversal required.

[Ganeshan Kalyani]

Sir, if the purchases against exempt supply is identifiable in books separately by way of division or department which is clear to auditor that it is not a common credit then you can state that proportionate reversal is not required. Otherwise one will assume that input tax credit is commonly used in taxable and exempt supply both and hence rule 42 is applicable.

[Shilpi Jain]

There could be certain other common expenses like rent, consultant fees, etc.which will be common to both the taxable and exempt sales. Credit reversal in respect of this common credit will have to be done.

[KASTURI SETHI]

I agree with both experts.

[CA Hemanth Kumar]

Specific ITC pertaining to exempt supplies - may be like packing covers etc will be completely ineligible. (if procurement made separately for exempt otherwise entire purchases of such packing materials, billing stickers etc will be considered as common credit).

Common ITC on expenses like rents, Audit fee, telephone, internet etc we need to do proportionate reversal.

AI Summary

Input tax credit reversal required for common credits used for exempt supplies under Rule 42, unless exclusively attributable. Rule 42 requires reversal of Input Tax Credit where inputs are commonly used for taxable and exempt supplies; identifiable and exclusively attributable purchases for exempt supplies need not be proportionately reversed. Specific inputs procured solely for exempt supplies are wholly ineligible, while common overheads benefiting both activities require apportionment and reversal.