Reversal of Input Tax Credit in GST | Tally Solutions

Reversing ITC

  • 1. About Input Tax Credit
  • 2. Components linked to Input Tax Credit
  • 3. Reversal of Input Tax Credit meaning
  • 4. How input tax credit reversal is calculated
  • 5. Reversing ITC in GST returns

1. About Input Tax Credit

Input Tax Credit can be said to be one of the key elements of the entire Goods and Service Tax (GST) framework with one of the major USPs i.e. seamless flow of credit in the entire GST chain.

The present indirect taxation system suffers with cascading tax effect due to non-availability of credit at various points in the supply chain. However, under the GST regime, credit of GST is expected to be available at every stage in the entire supply chain.

2. Components linked to Input Tax Credit

Input Tax Credit can be said to be one of the key elements of the entire Goods and Service Tax (GST) framework with one of the major USPs i.e. seamless flow of credit in the entire GST chain.

  • Input –Any goods other than capital goods used/intended to be used by a supplier for business purpose
  • Input Service – Any service used/intended to be used by a supplier for business purpose
  • Input Tax – IGST/CGST/SGST/UGST charged on supply of goods/services to a person and includes tax payable on imports and under reverse charge mechanism but excludes tax paid under composition scheme.
  • Capital Goods – Capital goods mean goods, the value of which is capitalized in the books of accounts of the person claiming the credit and which are used/intended to be used for business purpose.

3. Reversal of Input Tax Credit meaning

Just like in present tax structure, Reversal of Credit under GST also has the same meaning. In a layman language, reversal of credit means reversal of the credit already taken.

Reversal of credit means the credit which is availed and utilized, so long the final product is taxable, but subsequently when final product becomes exempt, the availed and utilized credit is reversed.

4. How input tax credit reversal is calculated

  • Reversing ITC related to inputs held as stock in trade: For inputs in stock, the input tax credit reversal amount shall be calculated proportionately on the basis of corresponding invoices on which credit had been availed.
  • Reversing ITC – Non-availability of Invoices: Where aforesaid tax invoices are not available, credit reversal amount shall be based on the prevailing market price of the goods on the date of relevant event, based on which reversal is required.
  • Reversing ITC related to Capital goods: For capital goods, the input tax credit involved in the remaining residual life in months shall be computed on pro-rata basis, taking the residual life as five years.

Illustration - Capital goods have been in use for 4 years, 6 month and 15 days.

The residual remaining life in months= 5 months (60 – 55 months) ignoring a part of the month Input tax credit taken on such capital goods = 12000

Input tax credit attributable to remaining residual life= 12000 X 5/60 = 1000

5. Reversing ITC in GST returns

Point 11 in GSTR 2 deals with reversal of input tax credit of which two are the most concerned topics of input tax credit reversals - ITC reversal in GST rule 42 and 43. Let us discuss the same in detail and the tax treatment for the same from the following table:

Description for reversal of ITC Tax treatment Amount of ITC
    IGST CGST SGST/UTGST IGST
Amount in terms of rule 42:
This section talks about input tax credits used for exempt supplies and personal purpose or wherein the supply is being partly used for the purposes of business and partly for other purposes.
The reversal of ITC in this case shall be attributed to the purposes of business or for effecting taxable supplies by
By adding such disallowed portion to output tax liability.        
Amount in terms of rule 43:
Input tax credit in respect of capital goods, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies.
Reversing ITC in this case shall be attributed to the purposes of business or for effecting taxable supplies by
By adding such disallowed portion to output tax liability.        
Description of reversal of ITC Tax Treatment Amount of ITC
business or for effecting taxable supplies by          

Note : The amount of ITC to be reversed should be further segregated into IGST, CGST, SGST and Cess and entered in the column mentioned above.



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