TaxTMI 
TaxTMI 
ITC Reversal Requirements Under Rule 42 for exempt by products
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....TC Reversal Requirements Under Rule 42 for exempt by products<br> Query (Issue) Started By: - Sudhir M Dated:- 21-5-2025 Last Reply Date:- 23-5-2025 Goods and Services Tax - GST<br>Got 12 Replies<br>GST<br>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....
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.... 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? Reply By Sadanand Bulbule: The Reply: 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, bei....
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....ng exempt goods, the input tax credit in such cases is partially admissible to the extent of taxable supplies. Reply By SUSHIL BANSAL: The Reply: 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. Reply By YAGAY andSUN: The Reply: Yes, ITC (Input Tax Credit) reversal under Rule 4....
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....2 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....
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...., 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 r....
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....everse ITC proportionately under Rule 42 for the exempt turnover from by-products. Reply By KASTURI SETHI: The Reply: Bye-product is also a final product. Reversal of ITC is required as advised by both Experts. Reply By Shilpi Jain: The Reply: Under the CENVAT credit regime there are decisions which have held that by product is incidental and not manufactured and so no ITC reversal....
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.... 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. Reply By KASTURI SETHI: The Reply: Whether bye-product is final product or not ? It depends upon case to case/commodity to commodity. Reply By Sadanand Bulbule: The Reply: Dear Sir ji The hon'ble Supreme Co....
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....urt 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. Reply By KASTURI SETHI: The Reply: Sh.Sadanand Bulbule Ji, Sir, Your views are welcome. I learn a lot from you and all ....
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....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. Reply By KASTURI SETHI: The Reply: Sh.Sadanand B....
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....ulbule 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 NIR....
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....MA CHEMICAL WORKS LTD. Reply By KASTURI SETHI: The Reply: 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 amo....
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....unting 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 "manufacture....
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....r" shall be construed accordingly and shall include not only a person w Reply By Sadanand Bulbule: The Reply: 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. Reply By KASTURI SETHI: The Reply: Sh.Sadanand Bulbule Ji, Sir, Thank you very much....
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..... 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 manu....
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....facturing process. <br> Discussion Forum - Knowledge Sharing ....