Managing Input Tax Credit (ITC) Transitions and Reversals in GST

In the realm of Goods and Services Tax (GST), the efficient utilization and handling of Input tax credit (ITC) play a pivotal role for registered entities. This article explores the intricacies of ITC reversal in specific scenarios and sheds light on the regulatory provisions that govern such transitions.

Reversal of ITC on Switching to Composition Levy or Exit from Tax-Paying Status [Section 18(4) read with Rule 44

Reversal of ITC on Inputs:

ITC on inputs should be reversed proportionately, considering the corresponding invoices on which credit had been availed for such inputs. In cases where invoices are not available, the reversal can be based on the prevailing market price of the goods on the date of the switch over or exemption.

Certification Requirement:

The details provided on the basis of prevailing Market value for the reversal of ITC should be duly certified by a practicing Chartered Accountant or Cost accountant. This certification ensures the accuracy and reliability of the information furnished.

Reversal on Capital goods:

For Capital goods, the ITC involved in the remaining useful life (in months) should be reversed on a pro-rata basis. The computation of this reversal takes the useful life as five years, and the amount is determined based on the proportionate remaining useful life of the Capital goods.

Debiting Electronic Credit or Cash Ledger:

The registered person is required to debit the electronic credit or cash ledger by the reversal amount concerning inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and capital goods on the day immediately preceding the date of switch over or the date of exemption.

Cancellation of Registration:

In case of registration cancellation, ITC on inputs held in stock, contained in semi-finished goods or finished goods held in stock, and Capital goods or plant and machinery on the day immediately preceding the cancellation date needs to be reversed. The computation of this reversal follows the methods applicable for sub-sections (4) and (6) of Section 18, as discussed earlier.

Amount Payable on Supply of Capital goods or Plant and Machinery with Availed ITC [Section 18(6) read with Rule 40(2) &Rule 44(6)

When a registered person decides to supply Capital goods or plant and machinery on which Input tax credit (ITC) has been previously claimed, Section 18(6) in conjunction with Rule 40(2) and Rule 44(6) outlines the calculation for the amount payable. The process is delineated below:

1. Determining Higher Amount:

The registered person must pay an amount equal to the higher of:

• ITC taken on such goods reduced by 5% per quarter of a year or part thereof from the date of issue of the invoice for such goods. This reduction accounts for the remaining useful life of the Capital goods.

• Tax on the transaction value of such capital goods/plant & machinery.

2. Separate Calculation for Remaining Useful Life:

ITC pertaining to the remaining useful life of the Capital goods should be computed separately for CGST, SGST/UTGST, and IGST

3. Payment in Case of Excess ITC:

If the calculated ITC remaining after reduction exceeds the tax payable on the transaction value of the capital goods, the excess amount needs to be paid.

This additional amount is then added to the Output tax liability of the registered person.

4. Special Provision for Certain Goods:

In specific scenarios, such as when refractory bricks, moulds and dies, jigs, and fixtures are supplied as scrap, the Taxable person may opt to pay tax on the transaction value.

Note: Rule 44(6) specifies the pro-rata basis for reversing ITC involved in the remaining useful life of the capital goods, considering the useful life as five years, and this is crucial in the computation process.

Transfer of ITC due to Change in Constitution of Registered Person [Section 18(3) read with Rule 41]

When a registered person undergoes a change in constitution, which includes scenarios like sale, merger, demerger, amalgamation, lease, transfer, or change in ownership, the unutilized Input Tax Credit (ITC) in the Electronic credit ledger can be transferred to the new entity. This is contingent upon the existence of a specific provision for the transfer of liabilities during the change of constitution. Notably, Circular No. 96/15/2019 GST, dated 28.03.2019, has elucidated that transfer or change in the ownership of business encompasses cases such as transfer or change in ownership due to the death of the sole proprietor.

In the context of a demerger, the apportionment of ITC occurs in accordance with the value of assets of the new units, as specified in the demerger scheme. Circular No. 133/3/2020 GST, dated 23.03.2020, has extended the application of the apportionment formula for ITC to all forms of business reorganization that result in the partial transfer of business assets along with liabilities, not exclusively limited to demergers. The term "value of assets" refers to the overall value of the business assets, regardless of whether ITC has been availed thereon.

The procedure for the transfer of ITC involves several key steps:

1. Furnishing Details on Common portal:

The registered person must submit details of the change in constitution through the prescribed form (ITC-02) on the Common portal.

2. Certification Requirement:

A certificate from a practicing Chartered Accountant or Cost accountant is essential, certifying that the change in constitution includes a specific provision for the transfer of liabilities.

3. Acceptance and Crediting of ITC:

Upon acceptance of the details by the transferee on the Common portal, the unutilized ITC is credited to the Electronic credit ledger of the transferee.

4. Bookkeeping by Transferee:

The transferee is responsible for recording the transferred inputs and Capital goods in their books of account.

Circular No. 133/3/2020 GST, dated 23.03.2020, provides additional clarity on the apportionment of ITC in business reorganization scenarios:

• The value of assets for demerger purposes is determined at the State level, requiring the filing of Form GST ITC-02 only in states where both the transferor and transferee are registered.

• The ratio of the value of assets is applied to the total unutilized ITC of the transferor, covering CGST, SGST/UTGST, and IGST credit, and also applies to the apportionment of cess between the transferor and transferee.

• The total amount of ITC transferred should not exceed the amount specified in the apportionment formula.

• The transferor has the flexibility to determine the amount to be transferred under each tax head (IGST, CGST, SGST/UTGST) within the total amount, based on the ITC balance available.

The apportionment formula is applied to the ITC balance of the transferor as available in the Electronic credit ledger on the date of filing Form GST ITC-02. Additionally, for the purpose of apportionment, the ratio of the value of assets, as on the "appointed date of demerger" specified in the demerger scheme, is applied to the ITC balance of the transferor on the date of filing Form GST ITC-02.