Reversal of Proportionate ITC

[Kaustubh Karandikar]

XYZ is supply product ‘A’ which is taxable and therefore charging GST. XYZ also buying Product ‘B’ which is attracting ‘Nil’ duty as per tariff. The same they are supplying without charging GST since attracting ‘Nil’ GST. Is XYZ required to reverse proportionate ITC against supply of product ‘B’ without GST, even if at the time of purchase itself it was attracting ‘Nil’ GST?

[Rajesh Kumar]

As per Section 17(2) of the CGST Act, 2017 read with Rule 42 & 43 of the CGST Rules, 2017, proportionate ITC to be reveres to the common ITC not whole ITC according to the ratio of exempted supply turnover. XYZ is required to reverse the common ITC proportionate to exempted turnover during every month and finally on yearly basis.

[KASTURI SETHI]

Dear Sh.Rajesh Kumar Ji,

How can we integrally link such transaction (wholly and separate supply) in this scenario for the purpose of reversal on pro rata basis ? Will you please throw more light ?

[KASTURI SETHI]

Framing of any law involves language game and we need to know the art of hermeneutics to decode the query and arrive at concrete and correct conclusion.Sh.Kaustubh Karandikar's queries are not a cake walk.His queries are always thought provoking and we learn a lot from his queries. These outpours are not baseless.

[Kaustubh Karandikar]

Thanks Rajesh and Kasturi Sir for your advice. Kasturi Sir, in fact i am learning many new things from your detailed and justified answers given by you from time to time.

[KASTURI SETHI]

Dear Sir,

It is your humbleness. A great personality is always humble. Your queries open new vistas. Drafting a query with a difference is an art.

[KASTURI SETHI]

Dear Sir,

Knowledge in any field should always be true, correct, complete and justified otherwise one cannot get desired results. If knowledge is half-baked, untrue & unjustified, that knowledge will be meaningless. Rather it will yield harmful results.

Just sharing with you as a gesture of good will.

Hope you will agree.

[Kaustubh Karandikar]

Yes Kasturi Sir, fully agree with your views.

[Ganeshan Kalyani]

Sir, in my view, the reversal of input tax credit is not required because the purchase was itself NIL rate or exempt. The reversal is required if input used commonly for the supply of taxable and exempt goods.

Sec. 2(47) defines “exempt supply” as "supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes nontaxable supply;". As per this definition exempt includes NIL rate of tax as well.

[Kaustubh Karandikar]

Ganeshan Sir, thanks for your reasoned reply. However, in my view, the reversal of ITC for common services is required under Rule 42 and 43 of CGST Act, 2017, if the taxable person is having both taxable and exempted supply. Since one of the supply is exempted, reversal is necessary. The reversal provision is linked with outward supply and no relation with inward supply.

[Rajagopalan Ranganathan]

Sir,

Product A is taxable supply and product B is exempted supply Only when tax paid inputs are used in the supply of products A & B the question of proportionate reversal of ITC availed will come into play. Since products A & B are supplied separately and no common inputs are used for such supply the question of propoertional reversal if ITC doesnot arise.

[KASTURI SETHI]

I concur with the views of Sh.Ranganathan, Sir and Sh.Ganeshan Kalyani, Sir.

[Shilpi Jain]

The definition of inputs is very wide under GST. it can be any goods that are used in business..

So any common expenses in nature of goods or services will have to be reversed proportionately

[KASTURI SETHI]

If we say reversal is required in this scenario, it is stretching the GST law.

AI Summary

Proportionate input tax credit reversal may be required where common inputs serve taxable and nil rated supplies.
Proportionate reversal of input tax credit is required under Section 17(2) and Rules 42-43 only in respect of common inputs or input services used for both taxable and exempt (including nil rated) supplies; inputs purchased at nil rate or exclusively used for exempt supplies do not attract pro rata reversal. The reversal is computed on the common ITC according to the ratio of exempt turnover and performed monthly with a final annual adjustment.