• Before discussing rule-42 of the CGST Rules , 2017 ( Exactly the same rule is envisaged in SGST Rules , 2017 ) it is pertinent to note that the Total input tax credit (referred to as T ) may be  attributable to the inputs intended to be used for following supplies during any tax period :                                                                        

(i) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized exclusively and entirely for supplies which are for the purposes other than business ( refereed to as T1) .

(ii) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized exclusively and entirely for exempted supplies which are other than taxable or zero rated supplies (refereed to as T2) .

(iii) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized exclusively and entirely for supplies which are described in sub-section (5) of section 17 of the CGST/SGST Act, 2017 ( refereed to as T3) . It is pertinent to note that sub-section (5) of section 17 embodies such supplies on which ITC is not admissible .

(iv) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized exclusively and entirely for taxable or zero rated supplies (refereed to as T4) .

(v) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized both for the exempted supplies and taxable or zero rated supplies e. such component of T which is attributable to such inputs which are different from those which are intended to be used entirely and exclusively for taxable or zero rated supplies or which are intended to be used entirely and exclusively for exempted supplies but as a mater of fact which are intended to be used both for the exempted as well as taxable or zero rated supplies .

(vi) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are to be used /utilized for supplies which are for the purposes of both for business and other than business. such component which is attributable to such inputs which are different form those which are intended to be used exclusively and entirely for supplies for the purposes of business or which are intended to be used exclusively and entirely for the supplies for purposes other than business and as a matter of fact it is such component which is attributable to such inputs which are intended to be used both for the supplies for the purposes of business and other than business .

  • It is quite evident that at the aforesaid serial no. (i) ( Referred to as TI) , (ii)       (Referred to as T2)  and (iii)  ( Referred to as T3 ) such components of ITC have been described on which ITC is not admissible . Thus the amount T1+T2+T3 is such that no ITC is admissible on it .

 

  • Thus the amount C1=T – (T1+T2+ T3) is such that on which ITC is to be considered for the tax period and such amount shall be credited to the electronic credit ledger of the concerned taxable person . However it is to be noted that that this amount of C1 shall include all the components described at serial no. (iv) ,  (v)     and (vi) . which are reiterated as below:

(iv) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized exclusively and entirely for taxable or zero rated supplies (refereed to as T4) .

(v) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are intended to be used /utilized both for the exempted supplies and taxable or zero rated supplies e. such component of T which is attributable to such inputs which are different from those which are intended to be used entirely and exclusively for taxable or zero rated supplies or which are intended to be used entirely and exclusively for exempted supplies but as a mater of fact which are intended to be used both for the exempted as well as taxable or zero rated supplies .

 (vi) amount of input tax credit (ITC) out of T or the component of T attributable to inputs which are to be used /utilized for supplies which are for the purposes of both for business and other than businesse. such component which is attributable to such inputs which are different form those which are intended to be used exclusively and entirely for supplies for the purposes of business or which are intended to be used exclusively and entirely for the supplies for purposes other than business and as a matter of fact it is such component which is attributable to such inputs which are intended to be used both for the supplies for the purposes of business and other than business .

  • It is also pertinent to note that in C1 there are component of ITC attributable to such inputs which are intended to be used for both the exempted as well as taxable or zero rated supplies and also intended to be used for supplies both for business and non business purposes thus that component which is involved in the exempted supplies and supplies for non purposes in the supplies of aforesaid mixed purposes shall have to be revered  (RITC ) to finally get actual amount for which ITC is admissible .
  • To arrive at such component which is to be revered because it is included in C1 following steps / calculation is to be done :
  • Since ITC is admissible in respect of the component  T4 which is related to inputs which are intended to be used /utilized exclusively and entirely for taxable or zero rated supplies thus this component is first to be deducted from C1 to arrive at the component of RITC and the remainder amount shall be C2= C1-T4 . This amount shall be called common credit because it has component of those inputs which are to be used for common purposes i.e. which are involved in both exempted and zero rated supplies as well as supplies of  both for  business and non business purposes .
  • Now from this common credit amount C2 the amount of input tax credit attributable to the exempted supplies which is to be revered ( referred to as D1) shall be calculated in the following manner –

                        D1 = C2 x  E / F   ( i.e. C2 multiplied by E divided by F )

This is a pro rata calculation where  E= aggregate of exempted supplies of the tax period in question and F is the total supplies of  such tax period .

It is to be noted that where the registered taxable person does not have any turnover during the said period or the aforesaid information is not available , the value of ” E/F ”  shall be calculated by taking values of “E” and “F” of the last tax period for which the details of such turnover are available , previous to the month during which the said value of ” E/F ”  is to be calculated .

Since this component is such on which ITC is not admissible but being  included in C1 it has already been credited to electronic credit ledger of the concerned taxable person thus this amount D1 needs to be revered and added to the output tax liability of such taxable person for the period .

It is also clarified that the aggregate value of exempt supplies and the total turnover shall not include the amount of any duty or tax levied under entry 84 of List 1 of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said     Schedule .

  • Now to arrive at the component of ITC attributable to non-business purposes from the combined component attributable to both for business and non-business purposes , it has been envisaged that such component shall be 5% of C2 and shall be referred to as D2 . Thus  D2= 5% of C2  and since this amount D2  is related to supplies for non-business purposes , such amount of D2 shall also be revered (RITC ) and shall be added to the output tax liability of the concerned taxable person .
  • Thus the total amount of RITC is (D1 + D2 ) and out of common credit the amount admissible for ITC shall be C3 which shall be –

                                      C3 = C2 – ( D1 + D2 )

  • Thus the total amount included in C1 for which ITC is admissible for the tax period shall be  T4 + C3 = A
  • Thus total amount of RITC included in C1 shall be D1 + D2 = B  which , as discussed above , shall be added to the output tax liability of the concerned taxable person for the period .
  • It can be verified that –

A + B = (T4 + C3)   +  ( D1 + D2 )

           = T4 +[ C2- (D1 + D2 ) ] + (D1 + D2 )            (putting the value of C3)

           =  T4 + C2

           = T4 + ( C1 – T4)                                             (putting the value of C2)   

           = C1 the amount which has been credited to the electronic ledger of the concerned taxable person .

The annual admissibility of ITC for the financial year shall be calculated in the aforesaid manner before the due date of  furnishing of the return for the month of September following the end of the financial year to which such credit relates and  –                                                                                                                                                   (a) where the amount finally calculated for annual D1 + D2 exceeds the aggregate of D1 + D2 ( calculated for each tax period ) , such excess amount shall be added to the output tax liability of the registered person in the month not later than the month of September following the end of the financial year to which such credit relates and the person shall be liable to pay interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment ;                                                                                                                                                       

 (b) where the aggregate of D1 + D2 ( calculated for each tax period ) exceeds the amount finally calculated for annual D1 + D2 , such excess amount shall be claimed as credit by the registered person in his return for a month not later than the month of September following the end of the financial year to which such credit relates .

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