Availing ITC however outward is exempted

[Rajesh Kumar]

Sir/Madam

Please enlight when party is availing ITC however outward supplies are exempted.

By this way, ITC is getting accumulated as No duty is payable .

1) Is there any provision which restricts the availing of ITC this way ? Or

2) is there any time limit till then, the said ITC to be reversed ?

We know that availing of ITC is not penal-able till its utilisation. As per department, party should not avail ITC when its outward supplies are exempted and to reverse the same under section 74(5) of the CGST Act, 2017.

[Shilpi Jain]

If the outward supply is exempt no credit would be eligible unless the outward supply is export.

[Shilpi Jain]

ITC eligibility and utilisation are 2 different aspects. It is important to understand this to understand the answer to this query

[Rajesh Kumar]

Ma'am , When the party is not utilising the said ITC and the same is getting accumulated.

And availing ITC is not punishable in GST.

Then, under which provisions, department can force to reverse the said ITC.

[Ganeshan Kalyani]

Sir, it is not the department which will ask you to reverse the input tax credit furnished in GSTR-3B. It is the GST law which restricts to furnish said detail in GSTR-3B. Furnishing input tax credit in GSTR-3B is allowed only when the same is eligible. Otherwise there is no purpose in furnishing the detail when there is no outward liability to offset it against.

[Ganeshan Kalyani]

You can however furnish the input tax credit detail in GSTR-3B when there is export be it exempt. And another scenario where you can furnish input tax credit is when your outward liability is on a lower rate than the input credit rate i.e. inverted duty structure.

[Ganeshan Kalyani]

Also, the input tax credit ledger appears in current asset. Auditor will ask why it is lying unutilised. Auditor my ask you to reverse it as they are not eligible. In that case , you have to debit the input tax credit to the cost of the purchase. When the credit is not in books you will have to reverse the same from electronic credit ledger thru GSTR-3B.

[Amit Agrawal]

Dear Shri Rajesh Kumar Ji,

I agree with views of my fellow professional colleagues!

From your post No. 3 above, you seems to hold a view that taking ineligible ITC is NOT a contravention of law till same is not utilised. On basis of this understanding of yours, you are harboring a view that Dept. cannot reversal / payment against any ineligible ITC u/s 74 (or for that matter u/s 73, if and as applicable) of the CGST Act, 2017.

I am afraid that your above understanding is contrary to the provisions of law. For reference, I am reproducing Section 74 (1) which reads as under:

"Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availedor utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availedor utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice."

So, if you are NOT eligible for ITC, Dept. is justified to start recovery proceedings under Section 73 or 74 (as the case may be) EVEN WHEN disputed ITC remains unutilized, in my view.

P.S. There is a view that section 17 (1) & Section 17 (2) reads with rules made thereunder does not debar taking ITC against goods / services used exclusively in providing exempted output supplies. Considering huge implications and potential risks thereof, this argument is ignored.

This is strictly personal view of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

You seems to got confused with Section 50 (3) which reads as under:

"Where the input tax credit has been wrongly availed and utilised, the registered person shall pay interest on such input tax credit wrongly availed and utilised, at such rate not exceeding twenty-four per cent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed"

While it is true that interest in above-said Section 50 (3) is NOT applicable when ITC is only wrongly availed BUT not utilised, I am afraid that this provision does not help you to avoid recovery proceedings (& penalties as may be applicable) u/s 73 & 74, in my view,

This is strictly personal view of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

Please read 'recovery proceedings' as 'Demand proceedings'.

[Rajesh Kumar]

Thanks sirs

i understood the facts and my doubt has been cleared.

Sir, Most of the builders and developers continually avails ITC and most of that got accumulated.

When they are required to reverse under section 17(2) read with Rule 42 ? Should reversal be month wise, FY wise or on completion of project ?

As at the beginning of project, their ITC remains in voluminous as compare to duty of outward supplies.

[Shilpi Jain]

Agree with Amitji.. though you may not be liable to interest for the wrongly availed credit which is not utilised, recovery can be initiated by the department for you to reverse the credit.

If not done this recovery may become time barred, which the department may not want.

[Shilpi Jain]

In case of real estate the reversal is required to be done every month and finally at the completion of the project.

Interest liability arises from 1st APR after the end of the FY in which the completion certificate is received.

[Amit Agrawal]

W.r.t. additional facts brought on record vide Post No. 10 above and Dept's view as explained in original query, I wish to say the followings:

Unless and until concerned person has much better reasons to prove his bonafide/s (i.e. to avail such ineligible ITC) & to avoid charge u/s 74, I am afraid that subject case is asking itself for imposing penalty u/s 74.

One cannot prove one's bonafides just either by pleading ignorance of law or by quoting non-existent legal provisions.

I would suggest to have a through review at your end about entire facts and legal strategies thereto as well as risk-appetite, before deciding to challenge penalty u/s 74 (as risk of penalty will increase upto 100% - of ITC under dispute - depending upon stage/s prescribed in said section 74).

This is strictly personal view of mine and the same should not be construed as professional advice / suggestion.

[Himansu Sekhar]

please refer to rule 42(1)(e). the amount to be credited to credit ledger excludes the itc for the exempted supplies. Hence availment is erroneous.

[Rajesh Kumar]

As per post No. 12 posted by Shilpi ma'am, in case of real estate the reversal is required to be done every month and finally at the completion of the project.

At the initial stage of the project, their output liabilities remain less and they have to purchase a lot for running construction. At this stage, are they also required to reverse ITC as per month wise calculation ?

if they not reverse ITC, are they liable for interest on account of monthwise non reversal of ITC till the final calculation at the time of completion?

Since, their supply becomes exempted after completion, then why they are required to reverse monthwise?

Please clear my confusion.

Regards

AI Summary

Exploring Input Tax Credit Reversal Requirements for Exempt Supplies Under GST: Legal Insights and Compliance Challenges A discussion on a forum addresses the issue of availing Input Tax Credit (ITC) when outward supplies are exempt under GST. The main query is whether ITC should be reversed if it remains unutilized due to exempt supplies and if there are legal provisions for such reversal. Responses indicate that ITC is not eligible for exempt supplies unless related to exports. While accumulating ITC is not immediately penalized, the law requires reversal under certain sections if ITC is ineligible, even if unutilized. In real estate, monthly and project completion reversals are necessary, with potential penalties for non-compliance.