REVERSAL OF ITC UNDER DIFFERENT SITUATIONS
1. As per Rule 37
Condition: ITC must be reversed if payment to the supplier is not made within 180 days from the invoice date.
- Example 1: A company purchases raw materials worth ₹1,00,000 plus ₹18,000 GST. It avails the ITC of ₹18,000 but does not pay the supplier within 180 days. It must reverse the ₹18,000 ITC.
- Example 2: A retailer avails ITC on services like rent or consultancy fees but delays payment beyond 180 days. ITC availed for these services must be reversed.
2. As per Rule 39
Condition: Reversal of ITC when credit notes are issued by Input Service Distributors (ISD).
- Example 1: An ISD incorrectly distributes ₹10,000 ITC to a branch. Upon correction, it issues a credit note to reduce the ITC by ₹2,000. The branch must reverse ₹2,000 ITC in its GST return.
- Example 2: An ISD distributes ITC for services used exclusively by a specific branch. If an adjustment shows excess distribution, the ITC must be reversed proportionately by the branch.
3. As per Rule 42
Condition: Proportionate reversal of ITC when inputs and input services are used for both taxable and exempt supplies.
- Example 1: A hospital sells taxable medicines (₹20,00,000) and provides exempt health services (₹30,00,000). Total input services worth ₹1,00,000 plus ₹18,000 GST are used for both activities. Since 60% of turnover is exempt, ₹10,800 (60% of ₹18,000) must be reversed.
- Example 2: A real estate developer constructs residential apartments (exempt) and shops (taxable). If ITC of ₹50,000 is claimed for construction materials, the portion attributable to residential apartments must be reversed.
4. As per Rule 43
Condition: Proportionate reversal of ITC on capital goods used for both taxable and exempt supplies.
- Example 1: A company purchases machinery worth ₹10,00,000 plus ₹1,80,000 GST. The machinery is used 40% for exempt supplies and 60% for taxable supplies. ITC for exempt supplies (₹72,000) must be reversed over 60 months (₹1,200 per month).
- Example 2: A hotel purchases equipment used for both room services (taxable) and banquet services (exempt). The ITC attributable to the exempt portion is calculated and reversed monthly over five years.
5. As per Section 17(5)
Condition: ITC is ineligible for certain goods and services.
- Example 1: A company buys a luxury car for its directors' personal use. ITC on the car's GST is not allowed and must be reversed if claimed.
- Example 2: A taxpayer organizes an event and avails ITC on catering services. Since catering is a blocked credit under Section 17(5), the ITC must be reversed.
- Example 3: A factory purchases goods for employee benefits like gym equipment or gifts. ITC on these items is ineligible and must be reversed.
FOR DETAILED ANALYSIS OF SECTION 17 (5) REFER SEPARATE BLOG