Reversal of input tax credit under special circumstances

We have already discussed when input tax credit is available to a registered taxpayer under GST law and what are the documents required to avail ITC. In this article, we will be discussing certain special circumstances when input tax credit has to be reversed. We have the following four cases, where input tax credit or ITC has to be reversed.

  1. Switching from regular scheme to composition levy
  2. When taxable goods and/or services is exempted
  3. Registration is cancelled
  4. In case of non-payment of consideration

Reversal of ITC on switching to composition levy

As per section 18(4) of the CGST Act, 2017, the registered person has to reverse input tax credit when such person switches from regular scheme to composition levy

As per the law, where any registered person who has availed input tax credit opts to pay tax under composition scheme, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the 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, reduced by 5% per quarter of a year or part thereof from the date of the invoice or such other documents on which capital goods were received by the taxable person, 

on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption.

If invoices are not available then, input tax credit can be reversed on the basis of the prevailing market price of such goods on the date of switch over or exemption. The details furnished on the basis of prevailing market value need to be duly certified by a practicing chartered accountant or cost accountant.

After payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

Taxable supplies exempted for suppliers

Where the goods and/or services supplied by the registered taxable person become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of;

  • Inputs held in stock; and
  • Inputs contained in semi-finished if finished goods held in stock; And
  • On capital goods reduced by 5% per quarter per year or part of the year;

on the day immediately preceding the date of exercising such option or, as the case may be, the date of such exemption.

After payment of such amount, the balance in input tax credit ledger, if any, lying in electronic credit ledger shall lapse.

Reversal of input tax credit when registration is cancelled

The amount of input tax credit relating to inputs held in stock, inputs contained in semi-finished and finished goods held in stock, and capital goods held in stock shall, for the purposes of section 29(5), be determined in the following manner, namely;

  • For inputs held in stock and inputs contained in semi-finished and finished goods held in stock, the input tax credit shall be calculated proportionately on the basis of the corresponding invoices on which credit has been  availed by the registered taxable person on such inputs.
  • For capital goods held in stock, the input tax credit involved in the remaining useful life in months shall be computed on a pro-rata basis, taking the useful life as 5 years.

You should determine the amount of inputs as discussed above separately for input tax credit of CGST, SGST, UTGST and IGST. These should form part of the output tax liability of the registered person and the details of the amount shall be furnished in Form GST ITC-03, where such amount relates to any event specified in 18(4) in Form GSTR-10, where such amount is related to the cancellation of registration.

If tax invoices related to the inputs held in stock are not available, the registered person shall estimate the amount based on the prevailing market price of the goods on the effective date of the occurrence of any of the events specified in 18(4) or as the case may be 29(5). The details shall be duly certified by a practicing chartered accountant or cost accountant.

The amount of input tax credit for the purpose of section 18(6) relating to capital goods shall be determined in the same manner as specified in clause (b) of sub-rule (1) and the amount shall be determined separately for input tax credit of central tax, state tax, union territory tax and integrated tax. Where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in Form GSTR-1.

Reversal of ITC in case of non payment of consideration

As per GST law, a registered person, who has availed of input tax credit on any inward supply of goods and/or services, must pay to the supplier thereof, the value of such supply along with the tax payable thereon, within 180 days from the date of the issue of the invoice. 

In the event of failure, the amount of input tax credit shall be added to the output tax liability of the registered person for the month in which the details are furnished.

The registered person shall be liable to pay interest at the rate 18% per annum for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability is paid. This means, corresponding credit availed by the registered person should be added to output tax liability along with interest.

Such person is also required to furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of 180 days from the date of the issue of the invoice.

After making payment of the value of goods and/or services along with tax, the recipient of goods can re-avail input tax credit without any time limit. If part payments are made then, proportionate credit would be allowed.

Above condition of payment of value of supply plus tax within 180 days is not applicable to following cases;

  • When tax is payable under reverse charge mechanism
  • Deemed supplies made without consideration.
  • value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.