Reversal of ITC Under GST

Revocations of GST Registration

What Is Reversal of ITC Under GST?

GST, Goods and Services Tax, is applied to the supply of services and goods and is an indirect tax. Under this regime, ITC, or Input Tax Credit is an important aspect wherein businesses can claim tax credits for the purchase of services or goods. This can then later be used to pay off their tax liabilities on their output. However, there are certain cases when the reversal of ITC under GST may be done. Read below to learn more about the rules related to the reversal of ITC under GST.

What is a Reversal of ITC?

The input tax credit, ITC is the credit for the GST paid on buying services or raw materials for the sale or manufacturing of products. If this is availed wrongly, then the reversal of ITC happens by paying the same amount as the wrongly availed amount. There are certain scenarios where, even if the conditions for an ITC claim are met, the ITC under GST must be reversed. The reversal of the ITC means that the credit taken for capital goods, input services, or other inputs that were used earlier will now be appended to the output tax. That essentially means that whatever credit was claimed earlier is completely nullified, and depending on when the reversal payment is done, interest also needs to be paid.

What are the Scenarios where ITC reversal is done?

There are various scenarios under which the ITC reversal is required. Below are some of them:

  • For a particular supply, the recipient does not pay consideration and more than 180 days have lapsed from the invoice issue date.
  • If capital goods are purchased and the GST component depreciation is claimed already, then while closing the books for that financial year, ITC has to be reversed.
  • Inputs are utilised for exempt supply, then as per Rule 42 ITC has to be periodically reversed when it is found that the ITC has already been claimed.
  • If the inputs have been used for personal or non-business purposes apart from using them for manufacturing purposes, ITC has to be reversed as per Rule 42 periodically upon identification of the ITC claim.
  • While filing Reg-16 Form, ITC has to be reversed for GST registration cancellation.
  • Half of the ITC reversal has to be done by financial companies or banks as per special rules while filing regular IT returns.
  • As of 1st July 2017, there shall be an ITC reversal of 5/6th of the amount drawn on gold dores taken during the supply of gold jewellery or gold dore bar.
  • ITC reversal during the filing of regular IT returns happens when ITC is taken on blocked credits. But the reversal happens only at the date and time of filing annual IT returns.
  • ITC will be reversed during IT return filing when the inputs in goods were destroyed, lost, stolen, etc. It shall be done for the month in which the loss was incurred.
  • ITC reversal happens for inputs that are distributed as free samples. The reversal occurs for the month when this act was committed and when IT returns are filed.

Different rules that are applied for Calculating ITC Reversal

There are a few rules that are used for calculating the ITC reversal amount; listed below are those provisions.

Rule 37

Under rule 37, if you are a recipient and you do not pay the supplier the invoice amount within 180 days, then the ITC has to be reversed. If, on the other hand, you pay a part of the invoice amount, then the ITC reversal is calculated on a pro-rata basis.

Rule 42 & 43

Both of these rules are applicable when the inputs used for supply are used for personal or non-business consumption. If the credit can be attributed specifically to a supply that is either nontaxable, taxable, or used for personal purposes, then that ITC amount must be deducted from the total ITC. Taxpayers must repay the ITC amount that was made for personal consumption.

On the other hand, if the ITC amount cannot be charged to a particular supply but is partially non-taxable and taxable and used for personal purposes, it has to be proportionately reversed to the amount of supplies that are not taxable and used for personal purposes. The rest of the ITC can be claimed. The calculation varies for input services or inputs covered under Rule 42 and capital goods covered under Rule 43.

Rule 44

The primary focus of this rule is on those who cancel their GST registration or choose the composition scheme to pay their taxes. For inputs that are semi-completed goods, finished goods, or in stock, the ITC to be reversed is calculated based on the invoices on which the credit was taken. For capital goods, the ITC is calculated on a pro-rata basis, and the ITC taken will be as per the useful life (in months).

Section 17(5)

ITC reversal of goods, inputs, or services that are used for personal purposes, goods that are destroyed, lost, stolen, or disposed of by giving them as free samples or gifts, and ITC taken that is blocked by Section 17 (5) have to be given back to IT by the recipient.

Rate of Interest on ITC reversal

Chapter X, Section 50 of the CGST Act, 2017 lists the provisions for payment of tax and the scenarios in which interest has to be paid. There are two instances where the payment of interest has to be made. When a person who has to pay the taxes fails to do so and when a person makes an excess or undue claim of ITC under the related provisions. However, Section 50 (3) states that the rate of interest paid should not be more than 24% p.a. and intends to cover contravention cases according to 42 (10) and 43 (10) sections. For all cases falling other than under Section 50 (3), the interest rate is 18% as per Section 50 (1). It also further states that 24% p.a. interest should be charged only in cases where ITC is reclaimed under Section 42(7). There are many other provisions mentioned in Section 43 that deal with credit notes. So ITC reversal at a 24% p.a. interest rate is applicable for credit reversal reclaim. In all other cases, 18% p.a. interest will have to be paid as per u/s 50 (1).

Major Issues with ITC Reversal

  • The recipient has no control over the supplier on the payment of tax to the government by the supplier. The issue is challenged in the High Court and the decision is pending.
  • According to the latest provisions, if the supplier avails excess ITC the recipient becomes ineligible for input credit tax. The problem is that there is no way the recipient can verify the ITC taken by the supplier.
  • Also, the recipient becomes ineligible for ITC if the supplier does not pay output tax or has paid less than what is specified in the GSTR-1 form. The recipient does not have the means to verify the accuracy of the details of the output tax paid by the supplier.

The major issue that needs urgent addressing is how a recipient can be denied ITC after having paid tax to the supplier because of the supplier's non-compliance

To conclude, ITC reversal is an important provision made by the government under the GST Act 2017, and all businesses should abide by it. It is important that businesses know the reasons for the ITC reversal and make sure to follow the provisions and rules. This will not only avoid penalties but also maintain a clean slate in terms of compliance and tax liabilities.