Input Tax Credits : Where the inputs or Input services used partly for the purpose of business and partly for others


In this article, we will discuss following two situations in respect to Input Tax Credits of Inputs and Input services:-

  • Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purpose. (In this case, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business). 
  • Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies. (In this case, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies).

Please note this article does not related to input tax credits on capital goods.

Input tax credits are not allowed to full extent in case there is any or both situations happened in business. In other words, only so much of credit is allowed which is related to taxable supplies. We will check the treatment of input tax credits in detail in this article:

In these cases, Input tax credit allowable under law will be calculated after calculating allowances / dis -allowances under two stages.

Stage 1: Credit allowed/disallowed for particular identifiable purchases in respect to non-business purposes or for Exempt sales.

 

Stage 2: Proportionate credit allowed/disallowed for common purchases, (not identifiable to business / non-business purposes, taxable / exempt supplies)


Stage 1

There are three phases at this stage to check whether or not input Tax Credit is allowed on particular Purchases, where such purchases are identifiable against particular sale transactions.

In the first phase, we will check whether credit of inward supplies is restricted or not under specific provisions of law. (Refer article : http://ca-sunilkumar.com/situations-input-tax-credits-gst-not-allowed/). If credit is restricted under law, story of credit will end here itself. However, if credit is not restricted, we will move to second phase.

In the second phase, we will test whether or not supplies are used for Business Purposes. If used for business purposes, we will go to the next phase. In case answer is ‘NO’, credit will not be allowed.

In the third phase, we will check whether such supplies are used for Taxable Supplies or for Exempt Supplies. If such supplies are used for taxable supplies, credit will be allowed to claim on such expenses. However, if such supplies are used for exempt supplies, credit will not be allowed.

Input Tax credit not “Restricted/Blocked” under Law

Business Purposes

(further will categorized into two parts)

Non – Business Purposes

(no credit allowed here)

Taxable Supplies

Exempt Supplies

(no credit allowed here)

Taxable supplies include Zero Rated Supplies.

 

Up to this stage, we will be able to determine specific tax credits disallowed to the extent tax credits attributable to Non-Business purposes and tax credits attributable to exempt supplies.

Now, it’s time to freeze the amount of common credits which are not-identifiable whether it is related to business/non-business purposes, taxable/exempt supplies.

C1  =  T – (T1 + T2 + T3)

Credits  Credited in electronic Credit Ledger  (C1) =

Total Credits available (T)

minus

Tax credit attributable to Non Business Purposes (T1)

minus

Tax credit attributable to Exempt Supplies (T2)

minus

Tax credit not allowed under law (T3)

 

Common Credits (C2) =

Credits  Credited in electronic Credit Ledger (C1)

minus

Tax Credit attributable exclusively to Taxable Supplies (T4)

Please be informed that T1’, ‘T2’, ‘T3’ and ‘T4’ shall be determined and declared by the registered person at the invoice level in FORM GSTR-2.


Stage 2

There are various other supplies which are commonly used for all type of supplies. These supplies could not be segregated among business or non-business purposes. These supplies are not specifically identifiable to taxable or exempt supplies. (for example: Telephone service, Internet service, Renting services, Consultancy services, Training services, etc.)

In this case, law has provided following formula to calculate portion of Input Tax Credits which is allowed against taxable supplies (i.e., ‘C3’) out of these common credits:

C3 = C2 – (D1 + D2)

What is D1 ? 

‘D1’ is a unique code provided under law to describe amount of Input tax credits attributable to exempt supplies. It is determined as per following formula:

D1{ Exempt supplies (E) ÷ Total Turnover (F)}  X  Common Credits ( C2 )

Exempt supplies include:-

> nil rated supplies

> exempt supplies

> non-taxable supplies

> supplies on which the recipient is liable to pay tax on reverse charge basis

> transactions in securities

> sale of land

> sale of building, subject to clause (b) of paragraph 5 of Schedule II

 

If value of both ‘E’ and ‘F’ not available in any tax period, values may be picked from last tax period.

 

What is D2 ?

‘D2’ is a unique code provided under law to describe amount of Input tax credits attributable to non-business purposes where common inputs and input services are used partly for business and partly for non-business purposes. It is determined as per following formula:

D2  =  Common Credits ( C2 ) X 5%


Other important points under Stage – 2

  • The amount ‘C3’ shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax.
  • The amount equal to aggregate of ‘D1’ and ‘D2’ shall be added to the output tax liability of the registered person.

YEAR END PROCEDURE FOR STAGE 2

The Input tax credits calculated as ‘C3’ shall be calculated finally for the financial year before the due date for furnishing return for the month of September following the end of the financial year. Any excess or shortage in ‘D1’ or ‘D2’ shall be dealt in following manner :-

  • In case, aggregate sum of ‘D1’ and ‘D2’ calculated at year end exceeds the aggregate of the amounts determined and disclosed in monthly returns, such excess shall be disclosed in any of return to be submitted for the month between April to September of such next financial year.

Be noted that such excess shall be disclosed as Output liability in the return and such liability to be paid along with Interest at the rate specified under section 50 of CGST Act from the 1st April of such next financial year till the date of payment.

  • In case, aggregate sum of ‘D1’ and ‘D2’ calculated at year end falls short the aggregate of the amounts determined and disclosed in monthly returns, such short amount shall be claimed as ‘Credit’ in any of return to be submitted for the month between April to September of such next financial year.

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