Reversal of ITC u/r 42, Goods and Services Tax - GST

[kanwaljeet singh]

Respected members,

I had a doubt regarding reversal of ITC o n cotton seed used for manufacturing of cotton seed cake(exempt) and cotton seed oil(taxable @5%), first doubt is that in this case will I have to apply rule 42 or I can simply take 90% of itc on cotton seed as for exempt supply( cotton seed cake production ratio) and balance 10% as itc for taxable supply(oil ratio)

And secondly if I had to apply rule 42, then in that case if In a particular tax period i had not sold oil i,e no taxable sales, just sale of exempted cotton seed cake, then my entire itc on cotton seed for that month has to be reversed as per rule 42 since in that case my exempt sales shall be total sales

Please reply

Posts / Replies

[Ganeshan Kalyani]

In my view, turnover ratio of previous year can be considered to arrive at credit eligible toward taxable supply. Otherwise turnover of previous month can be considered to arrive at the ratio. The final motive is to ensure that input tax credit attributable to taxable supply only to be availed.

[KASTURI SETHI]

I concur with the views of Sh.Ganeshan Kalyani Ji. His views are 100% correct. I further add that your first view should be certified by an CMA and then you can go ahead with your first method.

[kanwaljeet singh]

But sir rule 42 does not talk of taking credit or dividing credit in ratio of production, how could I do that???? And further if I do this the concept of COMMON CREDIT where output is partly taxable and partly exempted would be defeated!!!!

[KASTURI SETHI]

See replies of Sh.Sanjay Malhotra, C.S. and Sh.Sushil Gupta C.A. against Issue ID No.113659 dated 22.4.18

[Naveenkumar Medishetty]

See as per rule 42, It is a common credit. ITC needs to be reversed every month(tax period) based on exempted turnover of that particular month. In case no sales during the month we should consider last month sales figures. Finally, Gross reversal should be done based on the annual figures.

This approach is in line with rules.

There is no other approach.

[DR.MARIAPPAN GOVINDARAJAN]

I endorse the views of Shri Naveen Kumar.

[KASTURI SETHI]

If an assessee is to go out of 'tax period', he should go for the whole year as suggested by Sh.Ganeshan Kalyani Ji. Such practice was in force during pre-GST era. The ultimate purpose of law is to safeguard revenue. There should be no revenue loss at all. This precaution is to be taken. C.A.'s and CMA's certificate is valid in terms of Section Section 35 (5) of CGST Act. The department recognizes the same. Such certificate is a statutory evidence.

To remove phobia of interest and penalty.

If there is no revenue loss, neither interest is chargeable nor penalty is imposable on the following grounds:-

1. GST law is in its infancy. Unlimited amendments have taken place. It has not come of age. Still it will take a long time to stabilize.

2. Common Portal System is in its infancy. It has also not come of age. So many glitches have come to notice in the functioning of Common Portal System. It is an open secret.

[kanwaljeet singh]

I agree with views of naveen kumar sir, that means in nutshell I will have to reverse credit in ratio of turnover of every month and I CANNOT divide ITC in Production ratio, right???,

[Naveenkumar Medishetty]

Reply

Dear Kasthuri Sethi SIr,

You mean avail ITC entirely and reverse the credit based annual turnover? If it is so, there is no such provision under GST as of now. Yes, I too agree GST law has not reached its puberty but we cannot take the stand based on erstwhile tax laws give suggestions right.

Further, in my view, s.35(5)-certification nothing to do with ITC availment.

[KASTURI SETHI]

Dear Sh. Naveenkumar Medishetty Ji,

Sir, I agree with you to the extent that, "Finally gross reversal should be done with annual figures."

Section 2 (106) of CGST Act says  “tax period” means the period for which the return is required to be furnished."

Section 44 of CGST Act requires to furnish annual return. Why above "tax period" does not cover 'Annual Return ? ".

We are concerned with accuracy and accuracy of input-output ratio for the purpose of reversal proportionately is possible only if we take into account the whole year. The querist says that the quantity of exempted goods is more than taxable goods manufactured out of common inputs. Ratio may be 90 : 10, 80 : 20, sometime may be fully exempted in a particular month. It means variation in production of exempted goods and taxable goods. In order to set right this variation, the principle of average has to be resorted to. C.A. or CMA's certificate is legally valid. It is within a framework of GST laws. The department accepts it but at the same time the department may call for the records of the party whether correct reversal has been arrived at before its acceptance. Normally the department accepts. So CA or CMA's certificate is a fool proof documentary evidence.

This is my view. Whether the querist agrees or not ? It is his prerogative.

[Naveenkumar Medishetty]

Dear Sir,

Please read the rule 42 carefully.

In sub rule 1 though they have mentioned it as tax period. In sub rule 2 they mentioned financial year which would make it to interpret tax period as monthly/quarterly return.

Even IDTC, Background materials and ICAI materials it sounds the same interpretation

[kanwaljeet singh]

Dear naveenkumar ji kindly guide me as I also think that reversal CANNOT be done on production basis rather It will have to be done on turnover basis even it gives wrong results, as rule 42 never talked of dividing ITC in ratio of PRODUCTION of taxable and exempted goods,

Kindly share your views

[Naveenkumar Medishetty]

Yes, For details read the discussion

[KASTURI SETHI]

Dear Sh.Naveen Kumar Ji,

I agree with your views but one question arises if an assessee is unable to ascertain the quantum of proportionate credit on the basis of one month or three months tax period, what will be the alternative method ?

Your views pl.

[Yash Jain]

What are the implications of someone does less or Zero reversal for 2-3months BUT does complete reversal at the end of Financial Year I.e. march return

[KASTURI SETHI]

Dear Sh.Yash Jain Ji,

Sir, There is apprehension of interest or penalty. Nothing else. Nothing untoward is going to happen. If there is a fluctuation or inconsistency for one or three months or continually in a financial year, then best recourse is to work out the amount of reversal on the basis of whole year.

In my view it is hair splitting/nit picking ?

[KASTURI SETHI]

An article written by CA Shilpi Jain is worth reading. It was published on 17.12.18 in Article Section of TMI.

[Ganeshan Kalyani]

Production turnover cannot become base to arrive at a ratio for reversal of input tax credit. GST is on supply and therefore turnover ratio is a considered by most of the assessee. Entire year a previous month ratio or previous year ratio to be considered. If one want to focus on other aspects of GST then he should refer previous year turnover. And after the end the financial year when books of account for that year is finalized then revised working to carry out and actual reversal to be made.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Read your views. Can Chartered Engineer be helpful in this context ?

[Naveenkumar Medishetty]

Dear KASTURI SETHI Sir,

In case there is no turnover for the tax period(monthly/qtrly), turnover of the last tax period needs to be considered.

[KASTURI SETHI]

Dear Sh.Naveen Kumar Ji,

Yes. I agree with you but dues to fluctuations the accuracy can be evolved only on the basis of one year as suggested by Sh.Ganeshan Kalyani Ji.

[Naveenkumar Medishetty]

Yes sir. but that is how rules are framed.

Simply we have to follow.

[Mandar Sathe]

Dear Sir

The assessment of tax/reversal of credit is to be done month wise. This the formula provided in Rule 42 is to be applied using the figures of the month of assessment. I do understand that this will cause some difficulty if you have purchases in a month and no taxable sale in the said month.

You do have an option not to avail the credit in the month when there is no taxable supply and avail the same in the subsequent month.

Having said that one has to be aware that Rule 42(2) provides that at the end of the year an annual calculation is also required to be done and any excess credit availed has to be reverted or re-credit can be taken of excess reversal based on the annual calculation. Technically the values of previous year can not be taken as a bench mark. (the provisions of Rule 42 under CGST Act are different for the concept of Rule 6(3) of the CENVAT credit Rules)