#Common Credit for Taxable & Exempted Supplies : Reversal of Credit Rule 42 & 43# By SN Panigrahi, How to Apportion Credit under Sec 17 of CGST Act, 2017, Rule 42: Manner of determination of input tax credit in respect of Inputs or Input Services and reversal thereof, Rule 43. Manner of determination of input tax credit in respect of capital Goods and reversal thereof in certain cases

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Taxable
Supplies
Exempted
Supplies
Non-Business
Personal Use
How to Apportion Credit under Sec 17 of CGST Act, 2017
SN Panigrahi

2. 2SN Panigrahi

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Sec 17(1)
Where the goods or services or both are used by the registered person partly for
the purpose of any business and partly for other purposes, ITC is Restricted
to Business Purpose only - Not Allowed if Goods or Services are used for other than
Business Purposes
Sec 17(2)
Where the goods or services or both are used by the registered person partly for
the purpose of any Taxable Supply and Exempted Supply, ITC is Restricted to
Taxable Supply only - Not Allowed if Goods or Services are used for Exempted Supply
Sec 17(3)
Value of Exempt supply shall include RCM supplies, transactions in securities,
sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of
building
Sec 17(4)
Banking Company or a Financial Institution : Option to Avail 50% of ITC on
Monthly Basis
SN Panigrahi

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Use of Input Tax
Credit
For Business
Purpose
Other
Purposes
ITC Allowed
ITC Not
Allowed
Sec 17. (1) of CGST Act :
Where the goods or services or both are used by the registered person partly for the purpose of any
business and partly for other purposes, the amount of credit shall be restricted to so much of the input
tax as is attributable to the purposes of his business.
Reverse the
Credit if
Taken
SN Panigrahi

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Use of Input Tax
Credit
Taxable Supply
Including
Zero Rated
(Exports & SEZs)
Exempted
Supplies
ITC Allowed
ITC Not
Allowed
Sec 17. (2) of CGST Act :
Where the goods or services or both are used by the registered person partly for effecting taxable supplies
including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly
for effecting exempt supplies under the said Acts, 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.
Reverse the
Credit if
Taken
SN Panigrahi

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Common Credit for Taxable & Exempted Supplies
Reversal of Credit : Rule 42 & 43
Rule 42 of
CGST Rules
Rule 43 of
CGST Rules
Inputs or Input
Services and
Reversal thereof
Capital Goods and
Reversal thereof
SN Panigrahi

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Rule 42: Manner of determination of input tax credit in respect of Inputs or Input Services and
reversal thereof
•As per Rule 42, reversal is required for that portion of common credit which is attributable to exempt
supplies or for non-business use. (common credit means that part of ITC which cannot be identified
specifically to taxable supplies including zero rated or exempt supplies or non-business rather
commonly used for taxable supplies, exempt supplies or/and for non-business use.)
•A formula has been prescribed to determine the eligible ITC to be taken removing the ITC attributable
to exempt supplies or used for non-business use.
•For using that formula, we need to first work out 3 things i.e. common credit (C2), common credit
attributable to exempt supplies (D1), common credit attributable to non-business use (D2).
•Remainder ITC to be taken removing a part of common credit attributable to exempt supplies
etc. denoted by “C3”is- C3= C2- (D1+D2)
SN Panigrahi

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Rule 42 : Manner of determination of input tax credit in respect of
Inputs or Input Services and reversal thereof
Total
Input Tax
(T)
For Purely Personal Supply (T1)
For Purely Exempted Supply (T2)
Non-Eligible ITC (T3)
Normal Taxable Supply
Including Zero Rated Supply(T4)
Step -1 : Input Tax Credit Credited to
the Electronic Credit Ledger (C1)
C1 = T –(T1 + T2 + T3)
Step -2 : Find Common Credit (C2)
C2 = C1 – T4
Step - 3 : Input Tax Credit
Attributable towards Exempt
Supplies (D1)
D1 = (E ÷ F) × C2
Step - 4 : Amount of credit
attributable to non-business purposes
if common inputs and input services
(like House Keeping etc) are used
partly for business and partly for non-
business purposes (D2)
D2 = 5% of C2
Step - 5 : Eligible Input Tax Credit
(C3)
C3 = C2 – (D1 + D2)
Total
Turnover
(F)
Exempted Turnover (E)
Taxable Turnover
Including Zero Rated Supply (G)
Others Not Classified
Common CreditSN Panigrahi

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For Purely Non-
Business :
Personal Supply
(T1)
For Purely
Exempted Supply
(T2)
Non-Eligible ITC
Sec 17(5)
(T3)
Normal Taxable Supply
Including Zero Rated Supply
(T4)
Table
4(D)(2) of
GSTR 3B
Table
4(A)(5) of
GSTR 3B
Table
4(D)(2) of
GSTR 3B
Table
4(D)(1) of
GSTR 3B
Input Tax Credit Credited to the Electronic Credit Ledger = C1 = T – (T1 + T2 + T3)
: Shown in Table 4(A)(5) of GSTR 3B – All other ITC
Common Credit = C2 = C1 – T4
D1
Input Tax Credit
Attributable
towards Exempt
Supplies =
(E ÷ F) × C2
D2
Amount of Credit
Attributable to Non-
Business Purposes
D2 = 5% of C2
C3
Eligible Input Tax Credit =
C2 – (D1 + D2)
Amount to be Reversed as per Rule 42(1)(m) in Table 4(B)(1) of GSTR 3B
Total Input Tax (T)
E = Exempted
Turnover
F = Total
Turnover in
the State
SN Panigrahi

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Table 4 of GSTR 3B
Amount to be Reversed (D1+D2) as per Rule 42(1)(m) in Table 4(B)(1) of
GSTR 3B
D1
Input Tax Credit Attributable
towards Exempt Supplies =
(E ÷ F) × C2
D2
Amount of Credit
Attributable to Non-
Business Purposes
D2 = 5% of C2

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Particulars Amount Remarks
Gross amount of Tax Charged on Inputs / Input
Services (T)
xxxxx Gross tax amount in
respect of inputs/input
services procured
Less: Tax component on goods and services
exclusively used for non-business use
(Personal)
xxx Can be identified
separately
Less: Tax component on goods and services
exclusively used for effecting exempt supplies
xxx Can be identified
separately
Less: Ineligible credit as per Sec 17(5) rent a cab,
works contract etc.
xxx As per Sec 17(5)
Less Normal Taxable Supply
Including Zero Rated Supply
xxx Taxable Supplies
Common Credit xxxxx
Working of C2, D1 and D2
1. Working of Common credit:
SN Panigrahi

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Particulars Amount Remarks
Value of exempt supplies xxxx Exempt supplies defined in Sec 2(47)
Add: Value of outward supplies on which
recipient is liable to pay tax under
reverse charge mechanism
xxx This is for GTA, Legal consultants etc. who
has to include
this value while arriving at exempt supplies
value
Add: Sale of land xx
Add: Sale of Building xx If the same is not subject to GST as per Para
5(b) to Schedule II to CGST Act. Sale of
building subject to GST only when any
amount received by builder before issuance
of completion certificate
Aggregate value of exempt supplies xxxx
•Where, Aggregate value of exempt supplies to be arrived at as per the below table :
Working of common credit attributable to exempt supplies (D1):
•Where, Total turnover the state means exempt plus taxable value of GST supplies including zero
rated and non- GST supplies( of that state only) excluding tax amounts.
SN Panigrahi

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Working of common credit attributable to supplies used in non –
business use (D2):
•D2= 5% of common credit. As simple as that!!
Now, when we are able to calculate C2, D1 and D2, we can use the above formula i.e. C2- (D1+D2) to
calculate the C3 – Final ITC to be taken removing the ITC attributable to exempt/non business use supplies.
Point to be noted:
1. This C3 has to be calculated separately for CGST, SGST, IGST and UTGST.
SN Panigrahi

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Total Input Tax During the Tax Period : 10,00,000
ITC for Purely Non-Business : 50,000
ITC on Purely Exempted Supply : 1,00,000
Non Eligibiity ITC (Sec 17(5) : 30,000
ITC for Taxable & Business Activity : 7,00,000
Total Turnover in the State : 2,00,00,000
Exempted Turnover During the Period : 15,00,000
Calculate Value to be Reversed
under Rule 42(1)(m)
T : 10,00,000
T1 : 50,000
T2 : 1,00,000
T3 : 30,000
T4 : 7,00,000
C1 = T – (T1 + T2 + T3)
= 10,00,000 (50,000+1,00,000+30,000) = 8,20,000
C2 = C1 – T4 = 8,20,000 – 7,00,000 = 1,20,000
F : 2,00,00,000
E : 15,00,000
D1 = (E ÷ F) × C2 = 15,00,000 / 2,00,00,000 * 1,20,000
= 9,000
D2 = 5% of C2 = 5% of 1,20,000 = 6,000
Value to be Reversed = D1 + D2 = 9,000 + 6,000
= 15,000
SN Panigrahi

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Rule 43. Manner of determination of input tax credit in respect of capital Goods
and reversal thereof in certain cases
Capital Goods Exclusively Used for non-business
purposes or Exclusively for Exempt Supplies
Capital Goods Exclusively used for effecting
supplies other than Exempted Supplies
ITC Not Allowed
ITC Allowed
Rule 43 (1)(a)
Rule 43 (1)(b)
Amount of Input Tax
Other than these Two = A
Credit Allowed
Useful life of such goods
shall be taken as five years
from the date of the invoice.
Rule 43 (1)(c)
Aggregate of the amounts of A = A = Tc = Common Credit
Rule 43 (1)(d)
Rule 43 (1)(e)
Amount of common input tax credit attributable to a Tax Period = Tm = Tc / 60
Rule 43 (1)(f)
Aggregate of Tm for all such capital goods = Tr
Rule 43 (1)(g) :
Amount of common credit attributable towards Exempted Supplies = Te= (E÷ F) x Tr
Rule 43 (2) : The amount, as specified in sub-rule (1) shall be determined separately for input tax credit of
central tax, State tax, Union territory tax and integrated tax.
E = Aggregate value of exempt supplies,
made, during the tax period, and
F = is the total turnover of the registered
person during the tax period
SN Panigrahi

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Rule 43: Manner of determination of input tax credit in respect of capital
goods and reversal thereof in certain cases.
•ITC attributable on capital goods partly used for taxable supplies and partly used for effecting
exempt supplies or for non-business use shall be calculated as under:
[In short, the above formula will give us the ITC on common capital goods to be reversed as
attributable to use for exempt supplies or/and for non-business use)
SN Panigrahi

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•Such Tr to be calculated for every capital good having common use (i.e. for taxable as well as non –
taxable) every month till its life expires or disposed off.
•Tr to be calculated separately for CGST, SGST, IGST and UTGST.
•Formula of reversal as above, also need to be applied separately for CGST, SGST, IGST and UTGST
every month.
•Where, Aggregate value of exempted supplies and Total turnover shall be calculated in the
similar way as calculated for Rule 42(above)
SN Panigrahi

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New sub section inserted after sub-section (2):
“(2A). The amount not apportioned under sub-section (1) and sub-section (2) may, for the time being,
on the recommendations of the Council, be apportioned at the rate of fifty per cent. to the Central
Government and fifty per cent. to the State Governments or the Union territories, as the case may be,
on ad hoc basis and shall be adjusted against the amount apportioned under the said sub-sections.”.
Commentary – The objective to amend Section 17 of the Act is to make a provision for settlement of
balance in the integrated tax account equally between the Central Government and the State
Governments.
Sec 17(2A) of CGST Act :
IGST (Amendment) Act, 2018
No. 32 OF 2018
[29th August, 2018.]
SN Panigrahi

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Sec 17(3) of CGST Act :
The value of exempt supply under sub-section (2) shall be such as may be
prescribed, and shall include supplies on which the recipient is liable to pay
tax on reverse charge basis, transactions in securities, sale of land and,
subject to clause (b) of paragraph 5 of Schedule II, sale of building.
w.e.f 1-02-2019
Newly inserted explanation to Section 17(3):
‘Explanation.—
For the purposes of this sub-section, the expression ‘‘value of exempt
supply’’ shall not include the value of activities or transactions specified
in Schedule III, except those specified in paragraph 5 of the said Schedule.
SN Panigrahi

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Sec 17(4) of CGST Act : (For Banking & Financial Institutions)
A banking company or a financial institution including a non-banking financial
company, engaged in supplying services by way of accepting deposits,
extending loans or advances shall have the option to either comply with the
provisions of sub-section (2), or avail of, every month, an amount equal
to fifty per cent. of the eligible input tax credit on inputs, capital goods
and input services in that month and the rest shall lapse:
Provided that the option once exercised shall not be withdrawn during the
remaining part of the financial year:
Provided further that the restriction of fifty per cent. shall not apply to the
tax paid on supplies made by one registered person to another
registered person having the same Permanent Account Number.
SN Panigrahi

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Inputs (S.2(59))
Input Services (S.2(60))
Capital Goods (S.2(19))
Banking
Sector
Outward Supplies
Taxable / Exempted
Accepting Deposits,
Extending Loans or
Advances
Input Tax Credit
Two Options
Sec 17(4) of CGST Act
Avail 50% Credit only
The restriction of
50% shall not apply
to the tax paid on
supplies made by
Distinct Persons
Avail 100% Credit &
Reverse Proportionately
Towards Exempted
Supplies
Following Rule 42 & 43
Exempted Services:
Interest / Discount earned or paid for
Loans, Deposits or Advances
Taxable Services:
Any upfront or regular charges such as
Processing Fees, Documentation
Charges, Service Charges, Collection
Charges, Inspection Charges,
Repossession Charges, Foreclosure or
Prepayment Charges
Tax Liability
SN Panigrahi

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SN Panigrahi

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24. Contact Details:
SN Panigrahi
9652571117
snpanigrahi1963@gmail.com 24