ITC on Prepaid expense

[Narayan Pujar]

Hi,

Is there a need to reverse Input Tax Credit on prepaid expenses? Are there any case laws in this regard.

Thank you in advance.

[Raam Srinivasan Swaminathan Kalpathi]

IMHO no reversal is required.  Explanation to Sec.13(2) of CGST Act clearly delineates 

"the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment"

ITC can be availed on or after the date of the service invoice.

[Ganeshan Kalyani]

Sir, can you please elaborate your query.

[KASTURI SETHI]

Dear Querist,

What types of pre-paid expenses are involved ? Pl. elaborate with an illustration for correct and complete reply.

[Narayan Pujar]

Hi,

In case of Fire Insurance for Stock which is taken for calendar year, half of the expense belongs to current FY and the other half to subsequent FY. Here, the assessee is eligible for the ITC. But the question is how much of it?

Since the half of the expense is being considered as received in next FY, thereby treating it as prepaid in current FY, does it also imply that I am not eligible to credit proportionate to this half as per Section 16(2)(b)?

[Shilpi Jain]

Agree with view given by Mr. RaamSrinivasan Kalpathi

AI Summary

Input Tax Credit on prepaid expenses: entitlement follows invoice/payment timing under GST, no mandatory reversal generally required. Reversal of Input Tax Credit on prepaid expenses is generally unnecessary where the supply is deemed made only to the extent covered by the invoice or payment; ITC may be claimed on or after the service invoice date. The core issue is whether the portion of a prepaid annual payment attributable to the next financial year should be disallowed, which depends on applying the invoice/payment timing rule to the insurer's billing and the recipient's accounting treatment.