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Reversal of ITC credit u/r 42 of CGST Rules 2017 - formula needs correction


JANUARY 11, 2018

By S Narayanan, Advocate

RULE 42 deals with - "Manner of determination of input tax credit in respect of inputs or input services and reversal thereof"

The said provision has been introduced with view to deal with situations where credit in respect of inputs or input services has been availed but the same is -

- partly used for the purposes of business and partly for other purposes, or

- partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies.

While, Section 2(17) of CGST Act, 2017 defines "business", the term "non-business purposes" has not been spelt out. Nonetheless, one school of thought is that the same is attributable to "personal consumption" as per negative list under Section 17(5) of CGST Act, 2017. Hence, the clarity needs to be provided in this regard.

Further, we would like to bring to the attention that there is an apparent error in that part of the formula for determining "D2'" and the same is highlighted as under, which needs correction -

D1' is indicated as "the amount of input tax credit attributable towards exempt supplies, and calculated as D1= (E÷F) × C2

Let us consider for example -

'E' is the aggregate value of exempt supplies during the tax period to be of [Rs. 3,00,00,000] and

'F' is the total turnover in the State of the registered person during the tax period to be of Rs. 10,00,00,000 (excluding turnover of VAT goods)

C2 (which is the derived figure ) i.e ITC Credit attributable as "common credit" which is assumed to be of Rs. 2,50,000/-

Thus, 'D1' as per above formula by taking the above figures into consideration, the ITC common credit attributable to exempted supplies would be Rs. 75,000 i.e the Credit which is not entitled

= (3,00,00,000/10,00,00,000) x 2,50,000

Now, 'D2' - is the amount which needs to be determined of Credit (common) attributable to non-business purposes if "common inputs and input services" are used partly for business and partly for non-business purposes and it is stated in the provisions of Rule 42 that it shall be equal to five per cent. of C2; and as per the above given example, said common credit attributable to non-business purposes will be 5 % of 2,50,000 which will be Rs. 12,500/-]

Issue Involved

Since from common credit, credit of Rs. 2,50,000, already gets reduced to the extent of Rs. 75,000/-, we are of the opinion that 5 % should be computed on Rs. 1,75,000 (i.e Rs. 2,50,000 - Rs. 75,000) which will work out to Rs. 8,750/- as against Rs. 12,500/- ( 5 % of Rs. 2,50,0000) referred above.


Hence, for computing the reduction of 5 % of credit attributable to "non-business purposes", the formula should be corrected as under to avert the duplication of reduction of credit once such ITC attributable to exempted services and then again consider the said gross amount of credit of common input services for computing 5 %.

5 % of (C2 - D1) [ in the given example - 5 % of (i.e Rs. 2,50,000 - Rs. 75,000)]

I hope that the CBEC looks into the matter and does the needful by a suitable amendment in the referred rule.

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