Apportionment of Credit in GST – Exempt & Taxable

by gstination · Published February 17, 2018 · Updated February 23, 2018

How to take ITC when inputs are used for both exempt as well as taxable supply?
How to divide GST input credit between exempt and taxable?
How to determine how much inputs are used for non-business purposes?
Whether we have to take full ITC first, and then reverse, or take only eligible ITC?
And so on…

The answers to these questions are one of the most complicated provisions in GST.

In this article, we shall combine the provisions of Input Tax Credit in GST Act & Rules, simplify the formulas using short forms and easy words, and re-arrange them for better and comprehensive understanding. We shall leave nothing relevant.

Section 17 of the GST Act – Subsections 1 & 2

Where inputs are used partly for –	(i)	Business purposes	and	Non-Business purposes
	ITC shall be restricted to extent used for business purpose
	(ii)	Effecting taxable supplies (including zero-rated supplies)	and	Effecting exempt supplies
	ITC shall be restricted to extent used for effecting taxable supplies (including zero-rated supplies)

Note: “Exempt supply” here shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

So, this is the main basic provision, which says, that ITC shall be “restricted”. Now lets go to the specifics of how much, when, where etc.

Method of Attribution for Inputs & Input Services (Rule 42)

The input tax credit shall be attributable to the purposes of business or for effecting taxable supplies shall be determined in the following manner –

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‘T’ = Total ITC

Explicitly Dirty ITCs-

‘T₁’= ITC attributable to ‘used for other than business’
‘T₂’ = ITC attributable to ‘exclusively used for effecting exempt supplies’
‘T₃’ = Blocked ITC as per Sec 17(5)

Little bit Clean ITC = ‘C₁’

(C₁ shall be credited to ITC ledger)

Explicitly Clean ITC = ‘T₄’

‘T₄’ = ITC attributable to ‘exclusively used for effecting taxable supplies (including zero-rated)’

‘T₁’, ‘T₂’, ‘T₃’ and ‘T₄’ determined & declared by registered person at the Invoice level in Form GSTR-2.

The Mixed ITC = Common Credit = ‘C₂’

(Observe that does not contain both type of explicit elements)

Dirty portion 1 in the common credit

ITC attributable towards exempt supplies, be denoted as ‘D₁’ and calculated as –

where, ‘E’ = the aggregate value of exempt supplies during the tax period, and

‘F’ = the total turnover in the State of the registered person during the tax period:

Special Case: If do not have any turnover during the said tax period/ 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.

Note: ‘E’ = aggregate value of exempt supplies and ‘F’ = 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.

Dirty portion 2 in the common credit

(ITC attributable to non-business purposes – out of common credit)

Cleaned Credit

[Cleaned Credit = Common Credit – (Dirty Portion 1 + Dirty Portion 2)]

The amount ‘C3’ shall be computed separately for ITC of CGST, SGST/ UTGST & IGST.

The amount equal to aggregate of ‘D₁’ and ‘D₂’ shall be added to the output tax liability of the registered person. (Because earlier, whole C₁ was credited to ITC ledger, which included dirty portions)

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This whole exercise above will be done for each Tax Period (Month)

Annual Exercise yet again

The ITC as per above procedure shall be calculated finally for the whole financial year, before the due date for furnishing of GSTR-3 of September following the end of the FY to which such credit relates.

Where the [‘D1’ (+) ‘D2’] for whole FY calculated finally, exceeds the aggregate of the [‘D1’ (+) ‘D2’] calculated and reversed in each month, this means you need to reverse more ITC –

So such excess shall be added to the output tax liability of the registered person in any month, not later than the month of September following the end of the FY to which such credit relates.

Also will liable to pay interest on the said excess amount at the specified rate for the period starting from the 1^st April of the next FY till the date of payment

Where the aggregate of the [‘D1’ (+) ‘D2’] calculated and reversed in each month exceeds the [‘D1’ (+) ‘D2’] for whole FY calculated finally, this means you have reversed excess ITC –

Such excess amount shall be claimed as ITC by the registered person in his return for a month not later than the month of September following the end of the FY to which such credit relates.

Method of Attribution for capital goods (Rule 43)

The input tax credit shall be attributable to the purposes of business or for effecting taxable supplies shall be determined in the following manner –

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Indicate explicitly Dirty Credit

ITC on capital goods used/ intended to be used exclusively for non-business purposes/ for effecting exempt supplies shall be indicated in FORM GSTR-2 and shall not be credited to the electronic credit ledger.

Indicate explicitly Clean Credit

ITC on capital goods used/ intended to be used exclusively for effecting taxable supplies (including zero- rated supplies) shall be indicated in FORM GSTR-2 and shall be credited to the electronic credit ledger.

Common Credit

ITC on capital goods not covered in above two = ‘A’

It shall be credited to the ITC ledger and the useful life of such goods shall be taken as 5 years from the date of the invoice.

[Note: If any capital goods earlier covered under dirty credit, is subsequently covered here (common credit)

Then ‘A’ shall be arrived at by reducing the ITC at the rate of 5% per quarter or part thereof]

‘T_c’ = Aggregate of the amounts of ‘A’ credited to the ITC ledger in a tax period = Common Credit

[Note: If any capital goods earlier covered under clean credit, is subsequently covered here (common credit)

Then ‘A’ shall be arrived at by reducing the ITC at the rate of 5% per quarter or part thereof, and added to T_c]

Proportionate Common Credit for a Tax Period (month) = T_m

‘T_r’ = ITC at the beginning of a month, on all common capital goods whose useful life remains during the tax period = aggregate of ‘T_m’ for all such capital goods.

Dirty Portion – ITC attributable to exempt supplies = T_e

where, ‘E’ = Aggregate value of exempt supplies made during the month, and

‘F’ = Total turnover of the registered person during the month.

Special Case: If do not have any turnover during the said tax period/ 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.

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T_e (+) applicable interest = added to the output tax liability of the person making such claim of credit, during every tax period of the useful life of the concerned capital goods

[Note: The amount T_e shall be computed separately for CGST, SGST/ UTGST & IGST]

Conclusion

So, we saw that the provisions are somewhat similar to the old CENVAT provisions, but have been much more simplified and solidified with logic.

You can download our powerpoint presentation on the complete Input Tax Credit chapter here – Click here

This article was abridged from our book – “The Simplified Indian GST Law“

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Apportionment of Credit in GST – Exempt & Taxable

Section 17 of the GST Act – Subsections 1 & 2