ITC Reversal Requirements Under Rule 42 for exempt by products

[Sudhir M]

Is ITC reversal under Rule 42 required if the Company has ITC related to the manufacturing process, where the ultimate result of such manufacturing is taxable products, but there are by-products that are exempt under GST? Specifically, is the Company required to reverse common ITC in relation to the turnover of exempt sales of these by-products?

[Sadanand Bulbule]

Yes. In terms of Section 17[2] of the CGST Act, you need to restrict/reverse ITC to the extent of exempt supplies, irrespective by-products.

Since, no output tax is payable on the supply of by-product, being exempt goods, the input tax credit in such cases is partially admissible to the extent of taxable supplies.

[SUSHIL BANSAL]

CBIC Circular No. 41/15/2018-GST dated 26th March 2018 clarifies that when inputs/input services are used for both taxable and exempt supplies, reversal is necessary.

[YAGAY andSUN]

Yes, ITC (Input Tax Credit) reversal under Rule 42 of the CGST Rules is required in your case. As per Section 17(2) of the CGST Act, when inputs or input services are used for making both taxable and exempt supplies, the credit must be restricted to the portion attributable to taxable supplies. Since the by-products generated in your manufacturing process are exempt under GST and no output tax is paid on them, they are treated as exempt supplies, even if they are unintended outcomes.

The CBIC Circular No. 41/15/2018-GST dated 26th March 2018 confirms this position. It clarifies that in cases where common inputs or input services are used to produce both taxable goods (main product) and exempt goods (like by-products), the taxpayer must calculate and reverse the proportionate ITC related to exempt supplies. Therefore, your company must reverse ITC proportionately under Rule 42 for the exempt turnover from by-products.

[KASTURI SETHI]

Bye-product is also a final product.  Reversal of ITC is required as advised by both Experts. 

[Shilpi Jain]

Under the CENVAT credit regime there are decisions which have held that by product is incidental and not manufactured and so no ITC reversal required even if exempt.

Though this view looks difficult under GST as GST is on supply.

So reversal would be required. However, you need to reverse common credit.

[KASTURI SETHI]

Whether bye-product is final product or not ? It  depends upon case to case/commodity to commodity.  

[Sadanand Bulbule]

Dear Sir ji

The hon'ble Supreme Court has settled this issue under the Sales Tax & VAT regime. Bye-product is always a residuary product. However such bye-product can be potentially used as main raw-material by another industry as well. So bye-product cannot be given the character of being final product.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

 Sir, Your views are welcome. I learn a lot from you and all other experts who contribute to Discussion Forum. In order to gain more knowledge on the issue, I am posting here two case laws.

1999 (7) TMI 91 - CEGAT, COURT NO. III, NEW DELHI - COLLECTOR OF C. EX., AHMEDABAD Versus KETI CHEMICALS

2002 (11) TMI 93 - SC ORDER - COLLECTOR OF C. EX., AHMEDABAD Versus NIRMA CHEMICAL WORKS LTD.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

 Sir, Your views are welcome. I learn a lot from you and all other experts who contribute to Discussion Forum. In order to gain more knowledge on the issue, I am posting here two case laws.

1999 (7) TMI 91 - CEGAT, COURT NO. III, NEW DELHI - COLLECTOR OF C. EX., AHMEDABAD Versus KETI CHEMICALS

2002 (11) TMI 93 - SC ORDER - COLLECTOR OF C. EX., AHMEDABAD Versus NIRMA CHEMICAL WORKS LTD.

[KASTURI SETHI]

Dear Sir, 

Also worth reading for discussion sake

Section 2 Definitions Central Excise Act

[(f) “manufacture” includes any process, -

(i) incidental or ancillary to the completion of a manufactured product;

(ii) which is specified in relation to any goods in the Section or Chapter notes of [the Fourth Schedule] as amounting to [manufacture; or]

[(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,]

and the word “manufacturer” shall be construed accordingly and shall include not only a person w

[Sadanand Bulbule]

Dear Sir ji

I welcome your supply of case laws on the conjunction between the final product and the by-product derived out of common manufacturing process from the perceptive of Central Excise Tariff.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, Thank you very much. I intend to opine further in the interest of all. 

For GST purpose any item which is saleable and is marketable and is independently classifiable is to be treated as finished product even if it is the by-product of some other manufacturing process. Goods cannot be sold in the market without being completed/finished. Bye-product may be in the form of scrap or waste generated during the manufacturing process. 

AI Summary

Input Tax Credit Reversal Mandatory for Manufacturing Processes Generating Exempt By-Products Under Rule 42 Legal professionals discussed Input Tax Credit (ITC) reversal requirements under Rule 42 of GST regulations for manufacturing processes generating exempt by-products. The consensus is that companies must reverse ITC proportionately when manufacturing processes result in both taxable and exempt supplies, even if by-products are unintended outcomes. Section 17(2) of CGST Act mandates restricting input tax credit to the extent of taxable supplies, with CBIC Circular No. 41/15/2018-GST confirming this interpretation for common input usage across taxable and exempt product streams.