Reversals explained in Detail are as Follows:
(1) Rule 37 (2) – 180 Days Non – Payment
(2) Rule 39 (1) – Credit Note issued to ISD
(3) Rule 42 (1) – ITC on Input supplies partly used for business and partly for exempt supplies or Personal use
(4) Rule 43 (1) – ITC on Capital Goods partly used for business and partly for exempt supplies or Personal use
As a dealer, you would have availed ITC on inward supplies. But, if you fail to pay the invoice amount to the supplier within 180 days the ITC has to be reversed. If part of the invoice is paid the ITC will be reversed on a proportionate basis.
This means that the business has to maintain the creditors aging and basis on that they have to reverse the Input Tax Credit. In big organizations, it will be very challenging as they have lots of transactions and maintained from various locations. This process would be very easy if the accounting or ERP they are using supports the same. Though it looks like a complex process it would be simple if the technology is used in the right process.
The reversal of the ITC is based on the provisions given in Section 16 of the CGST Act
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
All the supplier invoices which are issued from 1st July 2017 to 3rd July 2017, if they are unpaid, ITC has to be reversed along with interest.
Also, the amount of ITC to be reversed should be further segregated into IGST, CGST, SGST, and Cess.
Mr. XYZ received goods on 1st July 2017 worth ₹ 10000 on which GST ₹ 1800 was charged.
Mr. XYZ claimed the GST of ₹ 1800 as ITC in his GSTR 3B
Mr. XYZ could not pay the invoice amount until December 2017.
This means that Mr. XYZ will have to reverse the ITC of ₹ 1800 while filing GSTR – 3B for December 2017 in January 2018.
When ISDs (Input Service Distributors) receive a Credit Note from a supplier, the ITC distributed previously needs to be reversed. The dealers to whom the credit was distributed have also to reverse this ITC. This reversal of input tax credit shall be in the same proportion as in the original ITC distribution by the ISD.
Also, the amount of ITC which has to be reversed should be further segregated into IGST, CGST, SGST, and Cess.
M/s A receives services worth ₹ 100000 on which GST of ₹ 18000 was paid.
M/s A distributed this credit to 2 dealers X and Y in the ratio of 1:2
X and Y claimed the ITC in the GSTR 3B.
Now M/s A received a credit note worth ₹ 23600 (including GST of ₹ 3600)
This GST of ₹ 3600 has to be reversed by A and B in the ratio of 1:2
A will reverse ITC of ₹ 1200 (3600 * 1 / 3)
B will reverse ITC of ₹ 2400 (3600 * 2 / 3)
This will be included in the GSTR 3B by both A and B in the reversal of ITC section.
The ITC used for exempt supplies and personal purpose has to be reversed in GSTR 3B.
How to Calculate ITC reversal on Exempt Supplies –
Step 1 – Calculate Common Credit
Common Credit = Total ITC on Input Supplies
(Less) ITC on supplies used for exclusively Personal Purposes
(Less) ITC on supplies used for providing exclusively exempt supplies
(Less) ITC on which credit is not available
(Less) ITC on supplies other than exempted but including zero-rated supplies (ITC on normal supplies)
In simple words, Common Credit is ITC on inputs partly used for exempt supplies or personal use.
Step 2 – Amount of reversal of ITC attributable to inputs partly used for Exempt supplies
= (Value of Exempt Supplies X Common Credit) / Total Turnover in the State
How to Calculate ITC on Personal Use – 5 % of Common Credit
Both these ITC amounts as calculated have to be reversed in the GSTR-3B filed by the dealer.
ITC on capital goods used for the supply of exempt supplies and non-business purposes will also be reversed.
The calculation will be similar to the calculation for ITC on inputs used for exempt supplies and personal use.
Step 1 – Calculate Common Credit –
Common Credit = ITC on Capital Goods
(Less) ITC on capital goods put to exclusively personal use
(Less) ITC on capital goods used for exclusively exempted goods
(Less) ITC on capital goods used in supplies other than exempted but including zero-rated supplies (ITC on normal supplies)
Step 2 – Amount of ITC reversal attributable to capital goods partly used for Exempt supplies and Personal use
= (Value of Exempt Supplies X Common Credit)/Total Turnover in the State
Step 3 – This reversal of input tax credit has to be done on a monthly basis. The life of any asset is considered as 5 years. So the amount of ITC reversal every month will be
= Amount arrived at in Step 2 / 60 (months).
(i) Reversing ITC related to inputs held as stock in trade:For inputs in stock, the ITC reversal amount shall be calculated proportionately on the basis of corresponding invoices on which credit had been availed.
(ii) Reversing ITC – Non-availability of Invoices: Where aforesaid tax invoices are not available, credit reversal amount shall be based on the prevailing market price of the goods on the date of a relevant event, based on which reversal is required.
(iii) Reversing ITC related to Capital goods:
For capital goods, the Input Tax Credit involved in the remaining residual life in months shall be computed on a pro-rata basis, taking the residual life as five years.
For Instance – Capital goods have been in use for 4 years, 6 months and 15 days.
The residual remaining life in months= 5 months (60 – 55 months) ignoring a part of the month Input Tax Credit taken on such capital goods = 12000
Input tax credit attributable to remaining residual life= 12000 X 5/60 = 1000.