Last updated: July 9th, 2021 6:22 PM

Rules 42 and 43 of CGST Rules - Input Tax Credit Reversal

Rule 42 and 43 of the CGST rules apply for claiming the input tax credit if the supply used partly for the purposes of business and partly for other purposes. To claim the input tax credit in such cases, the taxpayer should reverse the input tax credit claim if claiming the input tax credit stands nil. In this article, we look at Rules 42 and 43 of the CGST rules in detail along with the procedure for reversing input tax credit claim.

Rule 42 of CGST Rules

Manner of determination of input tax credit in respect of inputs or input services and reversal thereof.- (1) The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17, 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, shall attribute to the purposes of business or for effecting taxable supplies in the following manner, namely,- (a) the total input tax involved on inputs and input services in a tax period classified as ‘T’; (b) the amount of input tax, out of ‘T’, attributable to inputs and input services intended used exclusively for the purposes other than business, classified as ‘T1’; (c) the amount of input tax, out of ‘T’, attributable to inputs and input services used exclusively for effecting exempt supplies, classified as ‘T2’; (d) the amount of input tax, out of ‘T’, in respect of inputs and input services on which credit is not available under sub-section (5) of section 17, classified as ‘T3’; (e) the amount of input tax credit credited to the electronic credit ledger of the registered person, shall classify as ‘C1’ and calculated as C1 = T- (T1+T2+T3); (f) the amount of input tax credit attributable to inputs and input services intended to be used exclusively for effecting supplies other than exempted but including zero rated supplies, be denoted as ‘T4’; (g) ‘T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2; (h) input tax credit left after attribution of input tax credit under clause (g) shall be called common credit, be denoted as ‘C2’ and calculated as

C2 = C1- T4;

(i) the amount of input tax credit attributable towards exempt supplies, be denoted as ‘D1’ and calculated as

D1= (E÷F) × C2

where, ‘E’ is the aggregate value of exempt supplies during the tax period, and ‘F’ is the total turnover in the State of the registered person during the tax period: Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated; Explanation: For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule; (j) the amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes, be denoted as ‘D2’, and shall be equal to five per cent. of C2; and (k) the remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting supplies other than exempted supplies but including zero rated supplies and shall be denoted as ‘C3’, where,-

C3 = C2 - (D1+D2);

(l) the taxpayer shall compute the amount ‘C3’ separately for input tax credit of central tax, State tax, Union territory tax and integrated tax; (m) the amount equal to aggregate of ‘D1’ and ‘D2’ shall add to the output tax liability of the registered person: Provided that where the amount of input tax relating to inputs or input services used partly for the purposes other than business and partly for (m) the amount equal to the aggregate of ‘D1’ and ‘D2’ shall add to the output tax liability of the registered person: Provided that where the amount of input tax relating to inputs or input services used partly for the purposes other than business and partly for Provided that where the amount of input tax relating to inputs or input services used partly for the purposes other than business and partly for effecting the exempt of supplies identified and segregated at the invoice level by the registered person, the same shall incorporate in ‘T1’ and ‘T2’ respectively, and the remaining amount of credit on such inputs or input services shall incorporate in ‘T4’. (2) The input tax credit determined under sub-rule (1) shall be calculated finally for the financial year before the due date for furnishing of the return for the month of September following the end of the financial year to which such credit relates, in the manner specified in the said sub-rule and- (a) where the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts determined under sub-rule (1) in respect of ‘D1’ and ‘D2’, such excess shall add to the output tax liability of the registered person in the month not later than the month of September following the end of the financial year to which such credit relates and the said person should pay the interest on the said excess amount at the rate specified in sub-section (1) of section 50 for the period starting from the first day of April of the succeeding financial year till the date of payment; or (b) where the aggregate of the amounts determined under sub-rule (1) in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’. The individual can claim the excess amount as credit by the registered person in his return for a month not later than the month of September following the end of the financial year to which such credit relates.

Rule 43 of CGST Rules

Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.- (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, 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, shall attribute to the purposes of business or for effecting taxable supplies in the following manner, namely,- (a) the amount of input tax in respect of capital goods used or intended to use exclusively for non-business purposes or used or intended to use exclusively for effecting exempt supplies shall indicate in FORM GSTR-2 and shall not credit to the electronic credit ledger; (b) the amount of input tax in respect of capital goods used or intended to use exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall indicate in FORM GSTR-2 and shall credit directly to the electronic credit ledger; (c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted as ‘A’, shall credit directly to the electronic credit ledger and the validity of the useful life of such goods shall extend upto five years from the date of the invoice for such goods: Provided that where any capital goods earlier covered under clause (a) subsequently covered under this clause, the value of ‘A’ shall arrive reducing the input tax at the rate of five percentage points for every quarter or part thereof and the amount ‘A’ shall be credited to the electronic credit ledger; Explanation.- An item of capital goods declared under clause (a) on its receipt shall not attract the provisions of sub-section (4) of section 18, if it is subsequently covered under this clause. (d) the aggregate of the amounts of ‘A’ credited to the electronic credit ledger under clause (c), to be denoted as ‘Tc’, shall be the common credit in respect of capital goods for a tax period: Provided that where any capital goods earlier covered under clause (b) is subsequently covered under clause (c), the value of ‘A’ arrived at by reducing the input tax at the rate of five percentage points for every quarter or part thereof shall be added to the aggregate value ‘Tc’; (e) the amount of input tax credit attributable to a tax period on common capital goods during their useful life, shall denote as ‘Tm’ and calculated as

Tm= Tc÷60

(f) the amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, shall denote as ‘Tr’ and shall be the aggregate of ‘Tm’ for all such capital goods; (g) the amount of common credit attributable towards exempted supplies, shall denote as ‘Te’, and calculated as

Te= (E÷ F) x Tr

where, ‘E’ is the aggregate value of exempt supplies, made, during the tax period, and ‘F’ is the total turnover of the registered person during the tax period: Provided that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated; Explanation.- For the purposes of this clause, it is hereby clarified that the aggregate value of exempt supplies and the total turnover shall exclude the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule; (h) the amount Te along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, shall add to the output tax liability of the person making such claim of credit. (2) The concerned individual shall compute the amount separately for central tax, State tax, Union territory tax and integrated tax.