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TMI BlogNo GST liability on any portion of income – ITC reversal not required in all casesX X X X Extracts X X X X X X X X Extracts X X X X ..... No GST liability on any portion of income – ITC reversal not required in all cases - By: - Shilpi Jain - Goods and Services Tax - GST - Dated:- 13-7-2024 - - GST law as a concept provides input tax credit which is understood generally to be in such a way that any GST paid on the expenses incurred by any person will be eligible for set off against GST liable to paid on its taxable income. However, in case there is any portion of income that the taxable person makes, on which there is no GST payable either because of complete exemption or partial exemption or for a reason that certain income is not in respect of a supply of goods/services (say sale of land, etc.), then the general understanding is that proportionate amount of credit is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible and if taken, is required to be reversed. The above understanding is prevalent in the trade, industry, with the department officers and sometimes, certain consultants as well. Credit ineligible situations In this backdrop one has to understand that under GST there could be 2 scenarios in which credit is required to be reversed or is not eligible. First scenario is section 17 (5) of the Central Goods and Services Tax Act, 2017 , which gives a list of all blocked credits. The expenses or situations listed in such provision are those which are not eligible for credit in spite of the fact that these expenses are incurred for business and are for carrying out a taxable business. Some examples of blocked credits are food expenses, expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es incurred for construction of factory / office in which the entity would be carrying out its taxable business, etc. The other situation in which credit is not eligible is when the expense is incurred commonly towards earning taxable and exempt income or is in respect of earning only income/s which is exempt under GST. These are thus expenses exclusively used for an exempt business or commonly for taxable and exempt business. The law requires reversal of credit in proportion to the exempt income, which is to be computed as per rule 42 and 43. Reversal of credit w.r.t. exempt income What one needs to understand here is, what is an exempt income which requires reversal of credit. Exempt supply is defined in section 2(47) which will include N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il rated supplies, Wholly exempt supplies u/s 11 , and Non-taxable supplies. Nil rated supplies Nil rated supplies are those which are completely exempt i.e. the entire income is not liable to GST. There is an exemption notification issued for goods and another for services. The supply of goods and services listed in those notifications have a rate of tax as Nil. Wholly exempt supplies Wholly means completely. This includes supplies which are completely exempt. All wholly exempt supplies could be regarded as nil rated, though it is not necessary that all nil rated supplies should be wholly exempt. An example could be common area maintenance ( CAM ) charges collected by a housing society being exempt up to Rs. 7,500/- per month per member. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, if a society collects Rs. 10,000/- per month from members in 3bhk apartments and Rs. 6,000/- per month from members in 2bhk apartments, then the CAM of Rs. 6,000/- would be wholly exempt whereas CAM of Rs. 10,000/- would be partly exempt. This would not be wholly exempt. Non-taxable supply It is defined u/s 2(78) of the Act to mean supply of goods or services or both, which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act. Supply of alcoholic liquor for human consumption, petrol, diesel, etc. are all non taxable supplies since there is no levy of GST on these supplies. These are not exempted by way of notification but initially itself there is no levy of GST on them. No supply incomes Additionally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are certain entries in Schedule III to the Act which are treated as neither supply of goods nor supply of services. These are no supply items. However as per section 17 (3) sale of land and completed building, sale of certain warehoused goods are to be considered as exempt supplies for the purpose of calculating the credit reversals under GST. Apart from this the other entries listed in such schedule would not be regarded as exempt / non-taxable supplies. For example, salary income is a no supply income as per Schedule III and not relevant for calculating reversal of credit. Value deductions There are certain supplies under GST which have a value deduction given. These are supplies listed in rule 32 (sale of foreign currency, booking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of air tickets by agent, life insurance business, etc.) and rule 33 (pure agent reimbursement deductions). For the rule 32 supplies, a portion of their value is reduced in ascertaining the value on which GST is to be paid. As such these supplies are not exempt but only a portion of their value is given as a deduction for various reasons. Rule 33 reimbursements are also not individual supplies, but these are also deductions to a taxable supply. Any value which satisfies pure agent reimbursement conditions would not liable to GST. The question that now arises is whether these value exemptions mean that a portion of the income which is given as a deduction is to be regarded as an exempt income requiring reversal of credit? Computation of cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it reversal In view of the paper writer these deductions are only in the value and cannot be regarded as an exempt supply since the deductions themselves are not separate supplies. The service itself is taxable but to arrive at the taxable value, which is the value on which GST is to be paid, a certain deduction is given. These supplies/values listed in rule 32 and 33 are neither nil rated nor wholly exempt nor are they - not leviable to tax. Hence, if a life insurance company charges premium of ₹10,000 but pays GST only on ₹2500 in terms of provision of rule 32(4) , ₹7500 is NOT an exempt income. It is only a value deduction. In fact, the life insurance company provides the insurance services on which tax is paid. It is j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust that it is paid only on a portion of the income due to a reduction being made available in the law. Hence ₹7500 is not to be considered as a exempt income and thereby no credit reversal is required to be done in respect of this income on which GST is not paid. Clarification This has been clarified in circular No. 214/8/2024-GST dated 26 Jun 24 . Important points to note from the circular: It is not a case where the tax is not leviable on the supply of life insurance services, Just because some amount of consideration is not included in value of taxable supply as per the provisions of the statute, it cannot be said that the said portion of consideration becomes attributable to a non-taxable or exempt supply . Portion of premium not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... includible in taxable value is neither nil rated, nor wholly exempted and also not a non-taxable supply . Due to the above reasons, it has been clarified that no credit reversal is required for the portion of income which the life insurance company is taking a deduction in terms of rule 32 . Clarification applicable to other supplies In the same manner, all those supplies which have value reduction for computing the value on which GST is finally payable should not attract credit reversal. In view of the paper writer, in all such situations the logic of the circular can be applied and no reversal of credit is required. Reversal of credit w.r.t. CAM charges Another example could be services provided by the housing society referred to in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier part of this article. These associations / societies collect CAM charges eligible for a value deduction of ₹7500 in case charges exceed ₹7500. In case CAM is up to ₹7500 then the entire value is exempt and no GST is required to be paid. In cases where the CAM charges are ₹10,000 and the association ends up paying GST on only ₹2500 because of the reduction in value provided in the exemption notification, applying the logic of the circular discussed above the services provided by the association is not an exempt supply and no reversal of credit is required in respect of the deduction of ₹7500 taken by the association. This would mean that such association even though paying GST only on ₹2500 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile collecting ₹10,000 from each member, will still be eligible to avail the GST credit of GST charged on all its expenses except specifically blocked credit. This would practically reduce the cost for these associations and enable them to pay the GST liability on CAM charges without incurring any additional cost. However, it would be relevant to note that those CAM charges which are within ₹7500 and complete exemption is claimed as per the above exemption, would be regarded as an exempt supply and credit reversal would be required. Concluding remarks In this backdrop there could be many other supplies with similar exemptions which can be evaluated to identify whether credit will be fully eligible or if any reversal is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One has to remember that there is no equity in tax laws. All that is required is, to follow the words and spirit of the law. GST being a new law, clarifications at the early stages are a boon and will help in making the law more transparent and simple to comply with. (Views are strictly personal and should not be regarded as a legal opinion. For any feedback or queries please write to [email protected]) - Reply By deepak gulati as = Mam, With due respect, we would like to request you to throw some light on clarification given under Para No 5 of Circular No 109 dated 22.07.2024 regarding the Applicability of GST on CAM charges which says GST is applicable on entire value including 7,500 if the CAM charges exceeds 7,500. However, In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above article it was mentioned that GST is applicable only on differential amount. Thanks and Regards Dated: 15-7-2024 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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