Common ITC Reversal in GST

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GST Doctor

GST Doctor on Mon Apr 24 2023


Whenever a taxable person supplies both taxable (including zero rated) and exempted supplies. He has to reverse the common ITC (Input taken on services that are used for both taxable and exempted supplies) in the ratio of exempted supplies/total supplies. This is called common ITC reversal.

Relevant Section: Section 17(2) of CGST Act 2017

Relevant Rules: Rule 42/43 of the CGST Rules 2017

As per Rule 42, ITC reversal is required for that portion of common credit which is attributable to exempt supplies or for non-business use.

To calculate the common ITC reversal value we may use this formula:

Common ITC reversal value = Total ITC for common services x (exempted supplies/total supplies)

📝 Note: According to Section 2(47) exempted supply includes “nil rated supplies”.

Examples of Exempt Supplies

  1. Sale of MEIS Script
  2. Forward contract with banks (only 1% on value to be treated as exempt supply)
  3. Supply of other exempt goods (including nil rated)

Examples of Common ITC

  1. Banking Services
  2. Auditor fee
  3. Common accounting software
  4. Internet charges etc.

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Neeraj Yadav

Neeraj Yadav on Fri Sep 22 2023

There is no requirement for the reversal of Input Tax Credit (ITC) in the case of a tax-free sale of Merchandise Exports from India Scheme (MEIS) or Service Exports from India Scheme (SEIS) by exporters. This exemption is in accordance with the amendment made to Rule 43, which explicitly excludes the value of such sales from the scope of ITC reversal. [This amendment is specified in Notification No. 14/2022–Central Tax dated 05.07.2022].

Milan Tiwari

Milan Tiwari on Sun Sep 24 2023

Thanks for bringing this to our notice. We will update the article accordingly after examination.