When you pay tax on your output, you can deduct the tax you already paid on your inputs, which is known as an input tax credit. If you are a GST-registered manufacturer, agent, supplier, e-commerce operator, or aggregator, you may be eligible to claim input credit for tax paid on your purchases. To put it another way, Input Tax Credit under GST refers to claiming a credit for GST paid on products or services purchased for the purpose of running a business.

When a taxpayer claims the Input Tax Credit incorrectly, the idea of ITC reversal arises under GST. The credit should be reversed in this scenario by making a payment to that extent for the next month.

What is reversal of ITC?

An input tax credit is a credit for GST paid on purchases such as raw materials or services utilized in the manufacturing or sale of goods (ITC). If an input tax credit was claimed incorrectly, it should be restored by paying the amount of the ITC that was incorrectly claimed. Even though the essential elements for claiming ITC are met in some cases, the ITC claimed must be reversed (for example, blocked credits such as health insurance, food and beverage expenses, and so on). When the ITC is reversed, the credit for inputs, input services, and capital goods that was previously claimed is now added to the output tax liability, thereby nullifying the credit. Payment of interest may also be required, depending on when the reversal is made.

Claiming ITC under GST or converting into reversal ITC can be a daunting process for all GST taxpayers. To file your Income Tax return on time and to claim your ITC get in touch with Phoenixtax- Tax consultant in Chennai.

THE ITC MUST BE REVERSED IN THE FOLLOWING SCENARIOS:

  • The recipient does not give full or partial consideration to the supplier for a certain supply. (Chapter 37 of the CGST Rules)
  • As per Section 17(5) of the CGST Act, ITC has been claimed on blocked credits.
  • Inputs have been utilized to create a full or partial exempt supply, as well as a supply that is not for commercial purposes or for personal consumption. (CGST Rules, Rule 42)
  • Inputs utilized in goods that were given out as free samples or were lost, damaged, or stolen, for example.
  • GST registration may be cancelled or switched to the Composition Scheme. (Chapter 44 of the CGST Rules)
  • Inputs taken on Capital Commodities for the provision of entirely exempt items or goods that are both taxable and exempt.
  • (CGST Rules, Rule 43)
  • Depreciation has been claimed on the GST component of capital goods purchased under the Income Tax Act.
  • Under particular rules, banking and other financial companies can reverse 50% of ITC.
  • Input Service Distributor receives a credit note (ISD). (Rule 39 of CGST Rules)

Reversal of Input Tax Credit under Rule 37

  • A registered person who claims input tax credit on any inward supply of goods or services or both but fails to pay the value of such supply, as well as the tax due thereon, to the supplier within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply, the amount of value not paid, and the amount of input tax credit claimed proportionate to such amount not paid to the supplier. For the purposes of the second proviso to sub-section (2) of section 16, the value of supplies supplied without consideration as stipulated in Schedule I of the said Act must be regarded to have been paid.

Furthermore, for the purposes of the second proviso to sub-section (2) of section 16, the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be regarded to have been paid.

(2) The amount of input tax credit referred to in subrule (1) is added to the registered person’s output tax liability for the month in which the details are provided.

(3) The registered person is responsible to pay interest at the rate specified in sub-section (1) of section 50 for the period beginning with the date of crediting such supplies and ending with the payment of the amount added to the output tax due as specified in sub-rule (2).

(4) The time limit provided in section 16’s sub-section does not apply to a claim for re-availing of any credit that had previously been reversed in line with the Act or the requirements of this Chapter.

Reversal of Input Tax Credit under Rule 42&43

Both regulations apply to the reversal of inputs used for exempt supply or for personal use or consumption. If the credit can be traced back to a single supply – whether taxable, nontaxable, or spent for personal use – it should be differentiated from other ITC amounts. Because it is easily identifiable, the entire ITC is used. The taxpayer must directly reverse that amount of ITC. only attributable to a specific source that is non-taxable and used for personal consumption, when it is used incorrectly.

The TC amount that cannot be traced back to a specific supplier but is used to partially make both taxable and non-taxable supplies/supplies for personal consumption must be reversed proportionately to the quantity of non-taxable/used for personal consumption supplies. There is still time to claim the remaining ITC.

The formula is different for:

a) Inputs or input services, which are covered by Rule 42; and

 b) Capital goods, which are covered by Rule 43.

Reversal of ITC under Rule 44

The purpose of this rule is to reverse all ITC that a registered person has received if he elects to pay tax under the composition scheme or if his registration is revoked for any reason. The ITC that is to be reversed should be computed proportionately to matching invoices on which credit was obtained for inputs held in stock or contained in semi-finished goods and finished goods in stock. In the case of capital goods, the ITC will be calculated on a pro-rata basis and will be based on the useful life (in months).

Reversal of an ITC that has been blocked under Section 17(5):

Inputs on personal consumption products, inputs on goods that are lost, stolen, destroyed, or written off, or disposed of as a gift or free samples, and any ITC that is prohibited under Section 17(5) must be reversed by the recipient.

Interest Rate on ITC Reversal:

Section 50(3) indicates that the interest rate should not exceed 24 percent per annum and is intended to cover only cases of contravention as defined in sections 42 (10) and 43. (10). Section 50(1), on the other hand, is a residuary section that covers all instances not covered by section 50. (3). the interest rate specified in Section 50(1) is 18 percent per annum.

Section 42(10) states that only in exceptional circumstances should interest be charged at a rate of 24 percent per annum. Section 42(10) states that interest should be charged at a rate of 24 percent per annum only in cases where the recipient has reversed a reclaiming of ITC under Section 42(7) because he has claimed ITC in excess of the tax declared by the supplier in his GSTR-1 or the supplier has not declared such supplies in his GSTR-1.

Section 43, which deals with credit notes, contains similar rules. As a result, the rate of interest for reversal of ITC is only 24 percent p.a. if the credit has already been reversed. In all other situations, interest will be paid at a rate of 18 percent per annum u/s 50 (1).