REGARDING REVERSAL OF ITC AS PER RULE 42 ADD 43

[FARIDUDDIN AHMAD]

Sir in the case of reversal of ITC as per rule 42 and 43 for the period 2019-20 my client received notice u/s 73 to reverse the ITC as per rule 42 and 43. The facts of the case is my client is engaged in the business of manufacturing of vinner patta by processing wood used as raw material. However during the period 2019-20 woods are purchased from registered as well as unregistered dealer. During the period my client paid the RCM tax on purchase from unregistered dealer and availed the ITC. The department calculated the reversal as per rule 42 and 43 on whole ITC availed after payment of RCM and FCM. In response to the notice I have prepared reply and clarified that reversal of ITC availed on payment of RCM should not be required because purchase of wood from unregistered does not attract RCM also wood is not present in specified list of RCM, therefore availent of ITC on wrong payment of RCM tax should not be treated as ITC since in the eyes of law wrong payment of RCM does not attract formation of ITC. therefore, consider the matter as revenue neutral and rectify the demand restricted to only reversal of ITC availed on payment of tax on FCM basis.

[FARIDUDDIN AHMAD]

SIR KINDLY ADVISE I THIS CORRECT WAY TO DEFEND.

[Shilpi Jain]

You are right that there is no liability under RCM on purchase of wood from unregistered source.

before giving a reply to your specific query, could you please let us know what is the exempt supply in respect of which rule 42 and 43 is attracted?

[FARIDUDDIN AHMAD]

exempt supply are fire woods

[VENU K]

A combined reading of Sec 2 (63) regarding definition of Input Tax credit, Sec 2 (62) input tax and Sec 17 (2) regarding requirement for reversal of credit as well as Rule 42 regarding manner of reversing credit gives the impression that the Officer has prima facie made a strong case for reversal of taxes.

The real remedy in law, when a wrong tax is paid or a "not required to be paid tax" is paid without passing it on to anyone is to get a refund after paying the right tax forthwith if any, subject to provisions of unjust enrichment. The refund of course, shall be subject to limitations.

So, to my knowledge the taxpayer is in a very slippery slope. Who will heed and even if someone heeds, who has the authority to favourably respond to the please of revenue nutrality and let the tax payer retain the credit in his credit ledger when an SCN has already been issued is a tough question to answer.

[Shilpi Jain]

If you can show that GST was not payable first place under RCM, then the reversal of credit will not be required at all. 

No tax can be collected without authority of law. One can say that hte claiming of credit is as good as reversal of what was paid wrongly.

However, this will find favour not at the lower levels but at the tribunal and courts. In the past there have been such cases.

AI Summary

Wood Purchases Under GST: Manufacturer Challenges Tax Credit Reversal for Registered and Unregistered Dealer Transactions A manufacturer received a tax notice to reverse Input Tax Credit (ITC) under GST rules 42 and 43 for purchasing wood from registered and unregistered dealers. The taxpayer argues that Reverse Charge Mechanism (RCM) does not apply to wood purchases and seeks revenue neutrality. Forum participants suggest challenging the notice by demonstrating the tax was not originally payable, with potential resolution at tribunal or court levels, acknowledging the complexity of tax credit reversal.