Rule 42 & 43 of CGST/SGST Rules

Detailed Explanation of Rule 42 & 43 of CGST/SGST Rules

Rule 42 of CGST/SGST Rules

Manner of determination of input tax credit in respect of inputs or input services and reversal thereof

The ITC in respect of inputs or input services, which attract the provisions of section 17(1) and Section 17(2), which are

  • 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 be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely:

1.T=The total input tax involved on inputs and input services in a tax period.

2.T1= Attributable to inputs and input services intended to be used exclusively for the purposes other than business.

3.T2= Attributable to inputs and input services intended to be used exclusively for effecting exempt supplies.

4.T3=In respect of inputs and input services on which credit is not available under section 17(5).

5.C1=The amount of input tax credit credited to the electronic credit ledger of registered person and calculated as

C1 = T- (T1+T2+T3)

6.T4=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.

7.’T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2 and at summary level in FORM GSTR-3B.

8.C2=Input tax credit left after attribution of input tax credit under point no.6 shall be called common credit and calculated as

C2 = C1- T4

9.D1=The amount of input tax credit attributable towards exempt supplies and calculated as

D1= (E ÷ F) × C2

where,

  • ‘E’=Aggregate value of exempt supplies during the tax period, and
  • ‘F’=Total turnover in the State of the registered person during the tax period.

Notes:

  • 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.
  • For the purposes of the 9th point, it is 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 and entry 92A of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule.

10.D2=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 and shall be equal to 5% of C2 and calculated as

D2=C2×5%

11.C3=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 calculated as

C3 = C2 – (D1+D2)

12.The amount ‘C3’, ‘D1’ and ‘D2’ shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax and declared in FORM GSTR-3B or through FORM GST DRC-03.

13.The amount equal to aggregate of ‘D1’ and ‘D2’ shall be reversed by the registered person in FORM GSTR-3B or through FORM GST DRC-03.

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 exempt supplies has been identified and segregated at the invoice level by the registered person, the same shall be included in ‘T1’ and ‘T2’ respectively, and the remaining amount of credit on such inputs or input services shall be included in ‘T4’.

14.The ITC determined under above 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 above and

ClauseParticulars Particulars
(a)Where the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts determined above in respect of ‘D1’ and ‘D2’ i.e.
[Final (D1+D2) > Provisional (D1+D2)]
Such excess shall be reversed by the registered person in FORM GSTR-3B or through FORM GST DRC-03 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 shall be liable to pay interest on the said excess amount at the rate specified in section 50(1) for the period starting from the 1st April of the succeeding financial year till the date of payment.
(b)Where the aggregate of the amounts determined above in respect of ‘D1’ and ‘D2’ exceeds the aggregate of the amounts calculated finally in respect of ‘D1’ and ‘D2′ i.e.
[Final (D1+D2) < Provisional (D1+D2)]
Such excess amount shall be claimed 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.

Recommended: Read Rule 37-Reversal of ITC in case of Non Payment of Consideration

How to Apportion Credit Step by Step in respect of Rule 42

In many situations, the amount of input tax involved in exempt /non-business use is not easily discernible, as common goods and/or services are used for

  • making taxable supplies including zero rated supplies and exempt supplies and
  • business and non-business purposes.

Rule 42 of the CGST Rules provides the methodology for apportionment of ITC on inputs and input services and reversal of ineligible credit as follows:

Step 1 – Compute common credit

Total input tax involved on inputs & input services in a tax periodT
(-)Input tax on inputs & input services that are intended to be used exclusively for non-business purposes(T1)
(-)Input tax on inputs & input services that are intended to be used exclusively for exempt supplies(T2)
(-)Input tax on inputs & input services which are ineligible for credit(T3)
ITC credited to Electronic Credit LedgerC1
(-)ITC on inputs & input services that are intended to be used exclusively for taxable supplies including zero rated supplies(T4)
Common ITC available for apportionmentC2

Step 2 – Compute credit attributable to exempt supplies (ineligible credit) by apportionment of common credit

Apportion C2 into credit attributable to exempt supplies D1 as under:

D1 = (E/F) x C2

Step 3 – Compute eligible credits

Compute C3 attributable to business purposes and taxable supplies including zero rated supplies as under:

C3 = C2 – (D1 + D2)

Step 4 – Restrict ineligible credits

Reverse D1 + D2. i.e. Add it to the output tax liability.

Examples

PQR Ltd., a registered supplier, supplies taxable as well as exempted goods. Details of turnover of supply of goods during the month of August, 2020 includes

ParticularsAmount
Value of Taxable Supply of Goods (including zero-rated supply of goods)55,00,000
Value of Supply of Exempted Goods (exempted supplies)10,00,000
Value of out of Scope Supply (Transaction in Security)10,00,000
Total75,00,000

Details of Input tax credit for the month of August, 2020 are as under :

ParticularsCGST (Rs.)SGST (Rs.)IGST (Rs.)
Total ITC available1,80,0001,80,0002,16,000
The above ITC on input / input services includes the following
Credit on input goods/services exclusively used for supplying goods for personal use22,50022,50060,000
Credit on input goods/services exclusively used for supplying exempted goods45,00045,00072,000
Credit availed on input/input services which are ineligible under Section 17(5)42,00042,00048,000
Credit on input/input services exclusively used for supplying taxable goods (including Zero rated supplies)63,00063,00023,400

Determine the ITC entitlement of PQR Ltd. for month of August, 2020 and also determine the amount, if any, to be added to output tax liability of PQR Ltd. during August, 2020.

Ans. Computation of ITC eligible for the tax period August, 2020

ParticularsCGST (Rs.)SGST (Rs.)IGST (Rs.)
Total Input tax credit in tax period [T]1,80,0001,80,0002,16,000
(-)ITC exclusively related to non-business supply [T1]22,50022,50060,000
(-)ITC exclusively related to exempted supply [T2]45,00045,00072,000
(-)Blocked ITC [T3]42,00042,00048,000
Input tax credit credited to the E- ledger [C1]
C1 = T – [T1 + T2 + T3]
70,50070,50036,000
(-)ITC exclusively related to taxable supply (including zero-rated supplies)[T4]63,00063,00023,400
Common credit of input and input services used for providing supply of services [C2]
C2 = C1 – T4
7,5007,50012,600
Ineligible Common Credit (determined as per Rule 42)
Common credit related to non-business (deemed 5% of C2)[D2]375375630
Common credit related to exempted supplies (Common Credit * Exempted TO=20,00,000 / Aggregate TO = 75,00,000)[D1]2,0002,0003,360
Net eligible common credit
C3 = C2 – [D1 + D2]
5,1255,1258,610
Total credit eligible i.e. [T4 + C3]68,12568,12532,010
Amount to be added to output tax liability2,3752,3753,990

Rule 43 of CGST/SGST Rules

Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases

Subject to the provisions of section 16(3) [i.e. not claiming depreciation on tax portion of capital goods] the input tax credit in respect of capital goods, which attract the provisions of section 17(1) and section 17(2), which are

  • 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 be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely:

1.The amount of input tax in respect of capital goods used or intended to be used exclusively for non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall be indicated in FORM GSTR-2 and FORM GSTR-3B and shall not be credited to his electronic credit ledger.

2.The amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated in FORM GSTR-2 and FORM GSTR-3B and shall be credited to the electronic credit ledger.

3.A=The amount of input tax in respect of capital goods not covered under point no.1 and point no.2, shall be credited to the electronic credit ledger and the useful life of such goods shall be taken as 5 years from the date of the invoice for such goods.

Provided that where any capital goods earlier covered under point no.1 is subsequently covered under this point, the value of ‘A’ shall be arrived at by reducing the input tax at the rate of 5% 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 point no.1 on its receipt shall not attract the provisions of section 18(4) if it is subsequently covered under this point no.3.

4.Tc=The aggregate of the amounts of ‘A’ credited to the electronic credit ledger under point no.3, shall be the common credit in respect of capital goods for a tax period.

Provided that where any capital goods earlier covered under point no.2 is subsequently covered under point no.3, the value of ‘A’ arrived at by reducing the input tax at the rate of 5% points for every quarter or part thereof shall be added to the aggregate value ‘Tc’.

Advertisement

5.Tm=The amount of input tax credit attributable to a tax period on common capital goods during their useful life and calculated as:

Tm= Tc÷60

6.Tr=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 and shall be the aggregate of ‘Tm’ for all such capital goods.

Tr=Sum of Tm

7.Te=The amount of common credit attributable towards exempted supplies 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 in the State of the registered person during the tax period.

Notes:

  • 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.
  • For the purposes of 7th point, 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 and entry 92Aof List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule.

8.The amount Te along with the applicable interest shall, during every tax period of the useful life of the concerned capital goods, be added to the output tax liability of the person making such claim of credit.

9.The amount Te shall be computed separately for central tax, State tax, Union territory tax and integrated tax and declared in FORM GSTR-3B.

How to Apportion Credit Step by Step in respect of Rule 43

Rule 43 of the CGST Rules provides the methodology for apportionment of ITC on capital goods and reversal of ineligible credit as follows:

Step 1 – Determine common credit ‘Tc’ on capital goods as under:

(i)Identify input tax on capital goods used/ intended to be used exclusively for non-business purposes or making exempt supplies. Such amount will not be credited to electronic credit ledger [ECrL].

(ii)Identify input tax on capital goods used/ intended to be used exclusively for making taxable supplies including zero rated supplies and declare the same in GSTR 2 and GSTR-3B. Such amount will be credited to ECrL.

(iii)Identify input tax on capital goods not covered under (i) and (ii) above (i.e., the capital goods which are used/intended to be used commonly for making taxable as well as exempt supplies & business & non-business purposes] and denote the same as ‘A’. Such amount will be credited to ECrL. The useful life of such capital goods will be taken as 5 years from the date of invoice.

(iv)Change from exclusive use for non-business purpose/exempt supplies to common use: Where capital goods which were initially covered under (i) above get subsequently covered under clause (iii), compute ‘A’ by reducing ITC @ 5% per quarter or part thereof. Such reduced amount will be credited to ECrL.

(v)Add together the amounts of ‘A’ credited to ECrL to arrive at common credit ‘Tc’.

(vi)Change from exclusive use for taxable including zero rated supplies to common use: Where capital goods which were initially covered under (ii) above get subsequently covered under clause(iii), compute ‘A’ by reducing ITC @ 5% per quarter or part thereof and add such value to Tc.

Step 2 – Determine common credit during the useful life of capital goods for a tax period as under and denote the same as ‘Tm’:

Tm = Tc ÷ 60

Step 3 – Determine common credit at the beginning of a tax period for all capital goods whose useful life remains during the tax period as under:

Tr = Tm for such capital goods

Step 4 – Apportion common credit attributable to exempt supplies as under:

Te = (E ÷ F) x Tr

Step 5 – Restrict ineligible credit

Add Te to the output tax liability along with applicable interest during every tax period of the useful life of the capital goods concerned.

Examples

Example No.1

Mr. M, a manufacturer engaged in supplying exempted as well as taxable goods. On 25th September, 20X1 he purchased capital goods on which IGST paid Rs. 72,000, which were used for making exempted supplies.

On 10th April, 20X2 he used such capital Goods for purpose of supplying both Taxable as well as exempted supplies (i.e., partly for taxable and partly for exempted supplies). Determine implication on ITC.

Ans. As per Rule 43 of CGST Rules, 2017, where any capital goods earlier used for exempted supplies are subsequently used for providing taxable supplies also, then the eligible input tax credit shall be arrived at by reducing the input tax at the rate of 5% points for every quarter or part thereof i.e. Rs. 57,600 (Rs. 72,000 – (5% × 4 quarters × Rs. 72,000) shall be credited to the electronic credit ledger.

Amount of input tax credit attributable to April, 20X2 on common capital goods during their useful life = (Rs. 57,600 / 60 i.e. Rs. 960).

[Note : As per Section 2(92), “quarter” shall mean a period comprising three consecutive calendar months, ending on the last day of March, June, September and December of a calendar year. Here, 4 quarters taken as the Quarter ending on September 20X1, December 20X1, March 20X2 and quarter beginning from April 20X2.]

Example No.2

SNP Pvt. Ltd., Coimbatore manufactures and sells product ‘Z’ which is exempt from GST. The company sells ‘Z’ only within Tamil Nadu. The turnover of the company in the previous year was Rs. 55 lakh. The company expects the sales to grow by 20% in the current year. Owing to the growing demand for the product, the company decided to increase its production capacity and purchased additional machinery for manufacturing ‘Z’ on 01.07.20XX. The purchase price of the capital goods was Rs. 20 lakh exclusive of GST @ 18%.

However, effective from 01.11.20XX, exemption available on ‘Z’ was withdrawn by the Central Government and GST @ 12% was imposed thereon. The turnover of the company for the half year ended on 30.09.20XX was Rs. 40 lakh.

The Board of Directors of SNP Pvt. Ltd. wants to know whether SNP Pvt. Ltd. is already registered with respect to certain taxable supplies being made by it along with manufacture of exempt product ‘Z’, other facts remaining the same, can it take input tax credit on additional machinery purchased exclusively for manufacturing ‘Z’? If yes, then how much credit can be availed?

Advice SNP Pvt. Ltd. on the above issues with reference to the provisions of GST law.

Ans. Rule 43(1)(a) of the CGST Rules, 2017 disallows input tax credit on capital goods used or intended to be used exclusively for effecting exempt supplies.

However, as per section 18(1)(d) of the CGST Act, 2017, where an exempt supply of goods and/or services by a registered person becomes a taxable supply, such person gets entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable.

Rule 40(1)(a) of the CGST Rules, 2017 lays down that the credit on capital goods can be claimed after reducing the tax paid on such capital goods by 5% per quarter of a year or part thereof from the date of the invoice.

Therefore, in the given case, SNP Pvt. Ltd. could not claim credit on machinery till the time the supply of product ‘Z’ for which said machinery was being used was exempt. However, it can claim credit from 31.10.20XX – the day immediately preceding the date from which the supply of product ‘Z’ became taxable (01.11.20XX).

The credit will be available for the remaining useful life of the machinery and will be computed as follows:

Date of purchase of machinery01.07.20XX
Date on which credit becomes eligible31.10.20XX
Number of quarters for which credit is to be reduced2 (including part of quarter)
GST paid on machinery [Rs. 20,00,000 x 18%]Rs. 3,60,000
Credit to be reduced [Rs. 3,60,000 x 5% x 2]Rs. 36,000
Amount of credit that can be taken [Rs. 3,60,000 – Rs. 36,000]Rs. 3,24,000

Common Notes for Rule 42 & 43 of CGST/SGST Rules

  • If the registered person does not have any turnover during the said tax period, or the above information is not available, the values for the last tax period may be used.
  • Here, exempt supplies include reverse charge supplies, transactions in securities, sale of land and sale of building when entire consideration is received either after issuance of completion certificate by the competent authority or its first occupation, whichever is earlier. Thus, ITC attributable to such supplies will need to be reversed.
  • Here, exempt supplies exclude:-
  1. Transactions/activities specified in Schedule III except sale of land and sale of building as specified in bullet no. 2 above.
  1. Supply of services by way of accepting deposits, extending loans or advances where the consideration is either interest or discount. However, value of such services is included in the exempt supply when the same are provided by a banking company or a financial institution including a NBFC.
  1. Transportation of goods by a vessel from the customs station of clearance in India to a place outside India.

Thus, ITC attributable to such supplies need not be reversed.

  • Aggregate value of exempt supplies and total turnover excludes the central excise duty, State excise duty, central sales tax and VAT.
  • The value of exempt supply in respect of land and building is the value adopted for paying stamp duty and for security is 1% of the sale value of such security.
Advertisement

Recent Posts

Leave a Comment