Apparently, it may appear that whatever input tax credit incurred by the taxpayer shall be allowed as credit i.e. it is claimable. However, as per GST Law there are certain provisions which restrict the claim of input tax credit. The restriction in claiming input tax credit can be categorized into two head, namely:
- Apportionment of credit (which exist were a taxpayer has taxable as well as exempt turnover)
- Blocked Credit – which means that if transaction falls under the category of block credit then under circumstance such credit can be claimed by taxpayers.
In this article we have detailed out the situations where input tax credit is to be reversed/paid by the taxpayer.
What is Apportionment of Input Tax Credit?
The situation of apportioning Input Tax credit will arise were the taxpayer is supplying taxable goods or services and exempt goods or services. The following Principal will prevail for such taxpayers:
- The GST Law allow to claim the credit of input Tax Credit of goods or services which are used for Taxable supplies.
- The Input tax credit of goods or services which are used for exempt supplies cannot be claimed by the tax payers.
Points to be noted: – In the above scenario sale of taxable goods or services includes zero rated supply. Therefore, input tax credit can be claimed on Zero Rated Supply. The law restricts the claiming of input tax credit only on exempted supplies. Therefore, if the taxpayer is selling goods or services which are taxable as well as zero rated supplies then he is not required to apportion the credit and he may avail the credit whatsoever incurred by him except block credit.
Is the method of Apportioning Input Tax Credit same for Input, Input Service and Capital Goods?
No, Method of Apportioning Input Tax Credit is same for Input and Input Services. For Input Tax Credit on Capital Goods Separate method is to be followed.
What is the Method for Apportioning Input Tax Credit on Input and Input Services?
Let us understand the method of apportionment with the help of Example. A dealer is required to file monthly return and for the period of February 2020 he needs to calculate the eligible input tax credit. The facts of the dealer are as under:’
Data in Profit and Loss Credit Side | Amount |
Taxable Turnover | 32,00,000 |
Exempt Turnover | 18,00,000 |
Turnover – Zero Rate supply | 10,00,000 |
Total Turnover | 60,00,000 |
Data in Balance Sheet under Duties and Tax | Amount |
CGST Receivable | 1,00,000 |
CGST Receivable | 1,00,000 |
IGST Receivable | 1,50,000 |
Total Receivable Balance | 3,50,000 |
Steps to calculate the eligible Input Tax Credit
Step 1: – Derive the total Balance of Input Tax Credit for CGST, SGST and IGST from your Books of Accounts. Let us consider our example
Notation | Particulars | CGST | SGST | IGST |
T | Total Input Tax credit Balance | 1,00,000 | 1,00,000 | 1,50,000 |
Step 2: – Derive the Balance of Input Tax Credit which cannot be claimed as per GST Provision. As mentioned Input Tax Credit on Purchase or Service cannot be claimed if: –
- It is not used for the purpose of business
- It is used exclusively for the purpose of Exempt Supplies
- It falls under Block Credit
To derive the data for above categories, it is first important to know the business model of the taxpayer. Then, each invoice shall be verified or Input Tax Credit Register shall be verified to derive the Input Tax component for above mentioned Categories.
Notation | Particulars | CGST | SGST | IGST |
T1 | Input Tax Credit – for the purpose other than business (in ideal Scenario this kind of expenditure should not be booked in books of accounts as per accounting principal) | 10,000 | 10,000 | 15,000 |
T2 | Input Tax Credit – used for exclusive supply of exempt goods or services | 7,000 | 7,000 | 7,000 |
T3 | Input Tax Credit – under Block Credit | 7,000 | 7,000 | 7,000 |
Amount of Input Tax Credit which cannot be claimed (T1+T2+T3) | 24,000 | 24,000 | 29,000 | |
C1 C1 = [T-(T1+T2+T3)] |
Total Input Tax Credit Credited to Electronic Credit Ledger | 76,000 | 76,000 | 1,21,000 |
Step 3: – In step 2 we have derived the balance of Input Tax Credit (C1). This Input Tax Credit contain two Component which are: –
- Input Tax Credit which have been used commonly for supplying taxable as well as exempted goods or services
- Input Tax Credit which has been used exclusively for supply of Taxable (which includes zero rated goods or Services) Supplies.
Therefore, in step 3 we will derive the component of common input tax credit and Input tax credit which can be availed by the dealer. After the same is derived, Certain component of common input tax credit is liable to reversed through a formula which shall be dealt with in the next step.
Notation | Particulars | CGST | SGST | IGST |
T4 | Input Tax Credit – exclusively used for Taxable supplies | 30,000 | 30,000 | 50,000 |
C2 (C1-T4) |
Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | 46,000 | 46,000 | 71,000 |
Step 4: – The balance derived in Step 3 i.e. Common input tax credit which are partly used for taxable and partly for exempt supplies shall be apportioned on the basis of: –
- Turnover of the tax period for which liability is to be paid.
- In case were turnover detail for the particular tax period are not available then turnover shall be considered for the last tax period for which details are available.
Considering over above example the total turnover of the Dealer is Rs 60,00,000 and the exempt turnover isRs 18,00,000. Therefore, out of the total turnover of the dealer 30% pertains to exempt turnover. Hence, Input credit attributable to the exempt supplies out of the total Common Input tax credit shall be 30%. The calculation of the same is as follows: –
Notation | Particulars | Amount | % | CGST | SGST | IGST |
E | Exempt Turnover | 20,00,000 | – | – | – | – |
F | Total Turnover | 60,00,000 | – | – | – | – |
Percentage of exempt turnover to total turnover | – | 30% | – | – | – | |
C2 | Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | – | – | 46,000 | 46,000 | 71,000 |
D1(E/F*C2) | ITC attributable to exempt supplies | 13,800 | 13,800 | 21,300 |
Step 5: – As per the Provision of GST Law, if there is input tax credit attributable to the non-business purpose then 5% of Common Input Tax credit shall be reversed. Considering our example the reversal will be as follow: –
Notation | Particulars | CGST | SGST | IGST |
C2 (C1-T4) |
Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | 46,000 | 46,000 | 71,000 |
D2 | ITC attributable to non-business purpose | 2300 | 2300 | 3550 |
Step 6: – Calculate the total eligible credit out of the balance of Common Input Tax Credit. Therefore, from the balance of Common Input Tax Credit the balance pertaining to exempt supplies and balance pertaining to non-business purpose shall be reduced.
Notation | Particulars | CGST | SGST | IGST |
C2 (C1-T4) |
Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | 46,000 | 46,000 | 71,000 |
D1 | ITC attributable to exempt supplies | 13,800 | 13,800 | 21,300 |
D2 | ITC attributable to non-business purpose | 2300 | 2300 | 3550 |
C3 | Common Credit Eligible for ITC (C2-D1-D2) | 29,900 | 29,900 | 46,150 |
Step 7: – Calculate the total eligible Input Tax credit which can be utilized by the dealer. The total eligible input Tax credit shall include Input tax credit used exclusively for taxable supplies plus Common Credit attributable to taxable supplies. Considering out example the calculation is as under: –
Notation | Particulars | CGST | SGST | IGST |
C3 | Common Credit Eligible for ITC | 29,900 | 29,900 | 46,150 |
T4 | Input Tax Credit – exclusively used for Taxable supplies | 30,000 | 30,000 | 50,000 |
Total Input Tax Credit available to Dealer | 59,900 | 59,900 | 96,150 |
Notes : – The above calculation for Input Tax Credit shall be done for each tax period (i.e monthly or quarterly, as the case may be) and then the calculation is to be done for whole year. If there is any difference resulting to:
- Excess Credit utilized for Common Input, then the difference shall be paid with Interest
- Underutilization of Credit for Common Input, then such difference shall be available for the dealer to be utilized as Input Tax Credit.
What is the Method for Apportioning Input Tax Credit on CAPITAL GOODS?
Let us understand the method of apportionment with the help of Example. A dealer is required to file monthly return and for the period of February 2020 he needs to calculate the eligible input tax credit. The facts of the dealer are as under:’
Data in Profit and Loss Credit Side | Amount |
Taxable Turnover | 32,00,000 |
Exempt Turnover | 18,00,000 |
Turnover – Zero Rate supply | 10,00,000 |
Total Turnover | 60,00,000 |
Data in Balance Sheet under Duties and Tax | Amount |
CGST Receivable on Capital Goods | 96,000 |
CGST Receivable on Capital Goods | 96,000 |
IGST Receivable on Capital Goods | 96,000 |
Total Receivable Balance | 2,88,000 |
Step 1: – Derive the total Balance of Input Tax Credit for CGST, SGST and IGST on Capital Goods from your Books of Accounts. Let us consider our example:-
Notation | Particulars | CGST | SGST | IGST |
ITC-CG | Total Input Tax credit Balance FOR CAPITAL GOODS | 96,000 | 96,000 | 96,000 |
Step 2: – Derive the Balance of Input Tax Credit which cannot be claimed as per GST Provision. As mentioned Input Tax Credit on Purchase or Service cannot be claimed if: –
- It is not used for the purpose of business
- It is used exclusively for the purpose of Exempt Supplies
To derive the data for above categories, it is first important to know the business model of the taxpayer. Then, each invoice shall be verified or Input Tax Credit Register shall be verified to derive the Input Tax component for above mentioned Categories.
Notation | Particulars | CGST | SGST | IGST |
T1 | Input Tax Credit FOR CAPITAL GOODS for the purpose other than business | 1,500 | 1,500 | 1,500 |
T2 | Input Tax Credit – used for and used for affecting exempting supplies | 1,500 | 1,500 | 1,500 |
Ineligible Input Tax Credit on Capital Goods | 3,000 | 3,000 | 3,000 | |
CG/C1 | Net Input Tax Credit on Capital Goods [ITC-(T1+T2)] | 93,000 | 93,000 | 93,000 |
Step 3: – In step 2 we have derived the balance of Input Tax Credit on Capital Goods which contain two Component,they are: –
- Input Tax Credit on Capital Goods which have been used commonly for supplying taxable as well as exempted goods or services
- Input Tax Credit on Capital Goods which has been used exclusively for supply of Taxable Supplies.
Therefore, in step 3 we will derive the component of common input tax credit and Input tax credit which can be availed exclusively. After the same are derived, Certain component of common input tax credit is liable to reversed through a formula which shall be dealt with in the next step.
Notation | Particulars | CGST | SGST | IGST |
T3 | Input Tax Credit – exclusively used for Taxable supplies | 3,000 | 3,000 | 3,000 |
C2 (CG/C1-T3) |
Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | 90,000 | 90,000 | 90,000 |
Step 4: – The balance derived in Step 3 i.e. Common input tax credit which are partly used for taxable and partly for exempt supplies is Tax Credit pertaining to Capital Goods. The useful life of capital Goods is generally estimated for five years by the GST Laws. Therefore 1/60th Component of Input Tax Credit on Capital goods shall be apportioned on the basis of: –
- Turnover of the tax period for which liability is to be paid.
- In case were turnover detail for the particular tax period are not available then turnover shall be considered for the last tax period for which details are available.
Considering over above example the total turnover of the Dealer is Rs 60,00,000 and the exempt turnover isRs 18,00,000. Therefore, out of the total turnover of the dealer 30% pertains to exempt turnover. Hence, Input credit attributable to the exempt supplies out of the total Common Input tax credit shall be 30%. The calculation of the same is as follows: –
Notation | Particulars | Amount | % | CGST | SGST | IGST |
E | Exempt Turnover | 20,00,000 | – | – | – | – |
F | Total Turnover | 60,00,000 | – | – | – | – |
Percentage of exempt turnover to total turnover | – | 30% | – | – | – | |
C2 | 1/60th Component Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | – | – | 1,500 | 1,500 | 1,500 |
D1(E/F*C2) | ITC attributable to exempt supplies | 450 | 450 | 450 |
The above mentioned Input Tax credit attributable to exempt supplies shall be added back to the output liability of dealer. The Net eligible credit will be as follows: –
Notation | Particulars | CGST | SGST | IGST |
T3 | Input Tax Credit – exclusively used for Taxable supplies | 3,000 | 3,000 | 3,000 |
C2 | Net Input Tax Credit (Common input tax credit partly used for taxable supplies and partly for exempt supplies) | 90,000 | 90,000 | 90,000 |
Total Eligible Input Tax Credit | 93,000 | 93,000 | 93,000 |
Notes: –
- The above calculation for Input Tax Credit shall be done for each tax period (i.e monthly or quarterly, as the case may be) and then the calculation is to be done for whole year. If there is any difference resulting to:
1> Excess Credit utilized for Common Input, then the difference shall be paid with Interest
2> Underutilization of Credit for Common Input, then such difference shall be available for the dealer to be utilized as Input Tax Credit.
- If the capital goods is initially used for exempt or non business purpose and then the same is subsequently used for affecting exempt and taxable supplies, i.e. the capital goods fall under the common category of Input tax credit then the value of capital goods shall be reduced by 5% per quarter from the date of purchase till the date when the Capital goods fall under the Common Input Tax Category.