![Rule 42
Presentation by -
CA. Shashank Gupta
B.com, FCA
shashankguptafca@gmail.com
shashankguptaclasses.com
+91-9690580001, 7017374776
Apportionment of
ITC
(Taxable vs. Exempt)
(Business vs. Non-business)
©ShashankGupta[B.Com,FCA]](https://image.slidesharecdn.com/360degreeanalysisofrule42-181115063433/85/360-degree-analysis-of-rule-42-1-320.jpg)
![Thumb Rule©ShashankGupta[B.Com,FCA]
Inward Supplies (Goods and Services)
If used for taxable
outward supplies
ITC available
If used for Zero
rated outward
supplies
ITC available
If used for exempt
outward supplies
or non-taxable
outward supplies
ITC not available
If used for Non-
business purpose
ITC not available
Blocked Credit
[17(5)]
ITC not available
(irrespective of
end use)](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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360 degree analysis of rule 42
- 1. Rule 42 Presentation by - CA. Shashank Gupta B.com, FCA shashankguptafca@gmail.com shashankguptaclasses.com +91-9690580001, 7017374776 Apportionment of ITC (Taxable vs. Exempt) (Business vs. Non-business) ©ShashankGupta[B.Com,FCA]
- 2. Thumb Rule©ShashankGupta[B.Com,FCA] Inward Supplies (Goods and Services) If used for taxable outward supplies ITC available If used for Zero rated outward supplies ITC available If used for exempt outward supplies or non-taxable outward supplies ITC not available If used for Non- business purpose ITC not available Blocked Credit [17(5)] ITC not available (irrespective of end use)
- 3. Relevant documents©ShashankGupta[B.Com,FCA] Statement of Profit and Loss (P & L) Purchases Expenses Balance Sheet Capital Goods
- 4. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Classification of Inward supplies Inward Supplies (Goods and Services) One to one correlation No one to one correlation (i.e. used for common use)
- 5. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Further Classification One to one correlation Inward Supplies (Goods and Services) i.e. identifiable at invoice level If used for taxable outward supplies ITC available If used for Zero rated outward supplies ITC available If used for exempt outward supplies or non-taxable outward supplies ITC not available If used for Non- business purpose ITC not available Blocked Credit related goods and services [17(5)] ITC not available (irrespective of end use)
- 6. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Further Classification Continued…………… No one to one correlation Inward Supplies (Goods and Services) i.e. not identifiable at invoice level Blocked Credit related goods and services [17(5)] ITC not available Remaining goods and services i.e. commonly used goods i.e. used for taxable + exempt + business + non-business outward supplies/purposes Main point of discussion under Rule 42 & 43 [Contd…….]
- 7. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Further Classification Continued…………… Remaining goods and services i.e. commonly used goods i.e. used for taxable + exempt + business + non-business outward supplies/purposes Proportionate exempt part (how to calculate – Rule 42 & 43 tells us) ITC not available Proportionate non- business part (how to calculate – Rule 42 & 43 tells us) ITC not available Remaining part i.e. business + taxable ITC shall be available
- 8. Concept is complete, now we will see the drafting of Rule 42 & 43 (i.e. drafting and calculation of exempt and non-business part out of common credit)
- 9. Rule 42 (applicable on inputs and input services)
- 10. For better understanding, Take example of October month because return GSTR-3B shall be submitted by 20/11/2018
- 11. Rule 42©ShashankGupta[B.Com,FCA] Classification of inward supplies (inputs and input services) One to one correlation Inward Supplies (input and Services) i.e. identifiable at invoice level If used for taxable outward supplies [T4] ITC available If used for Zero rated outward supplies [T4] ITC available If used for exempt outward supplies or non-taxable outward supplies [T2] ITC not available If used for Non- business purpose [T1] ITC not available Blocked Credit related goods and services [17(5)] [T3] ITC not available (irrespective of end use)
- 12. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Further Classification Continued…………… No one to one correlation Inward Supplies (input and input services) i.e. not identifiable at invoice level Blocked Credit related inputs and input services [17(5)] [T3] ITC not available Remaining inputs and input services i.e. commonly inputs and input services i.e. used for taxable + exempt + business + non-business outward supplies/purposes [C2] Here, I see needless over clarification by Rule 42 [Contd….]
- 13. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Over clarification by Rule 42 Remaining goods and services i.e. commonly used goods i.e. used for taxable + exempt + business + non-business outward supplies/purposes Rule 42 has specified the formula to calculate this which I think is needless. Because this could have been done without any formula. Simply, it is the figure of the total credit in respect of goods or services which is being commonly used. My suggestion: practically, don’t apply this formula. It’s needless. Do it instead by your own calculation. This is like, you have received during October month inputs/input services on which total tax paid is Rs. 1,00,000. out of which Rs. 15,000 belongs to blocked credit and 75,000 belongs to other one to one correlated input/input services. Now very simply total common credit will obviously be Rs. 10,000 i.e., 1,00,000-15000-75000
- 14. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Over analysis leads to paralysis……………… Calculation of credit relating to (as given by Rule 42)- remaining goods and services i.e. commonly used goods i.e. used for taxable + exempt + business + non-business outward supplies/purposes [C2] Step 1: Calculate T, which is the total credit in respect of input and input services for the October month (in our example) Step 2 : Calculate C1 = T-T1-T2-T3 Step 3: Calculate C2 = C1-T4 It could have been alternatively calculated as C2=T-T1-T2-T3-T4 (simple mathematics). Note: rather, you could have calculated this without any formula
- 15. Background - Fundamental ingredients©ShashankGupta[B.Com,FCA] Suggestion for students…………………… Suggestion : Students for exams, don’t waste your time in calculating T1, T2, T3, T4, C1
- 16. So, you are here………………©ShashankGupta[B.Com,FCA] You have successfully classified inward supplies (whether by applying given formula or by your own instincts) Inward Supplies (Goods and Services) One to one correlation No one to one correlation (i.e. used for common use)
- 17. Main Part of Rule 42©ShashankGupta[B.Com,FCA] Apportionment of exempt and non-business part out of common credit Credit relating to remaining goods and services i.e. commonly used goods i.e. used for taxable + exempt + business + non-business outward supplies/purposes i.e. common credit [C2] Proportionate exempt part D1 = C2*E/F ITC not available = addition in output tax liability Proportionate non- business part D2 = C2*5% ITC not available = addition in output tax liability Remaining part i.e. business + taxable i.e. balance i.e. C3=C2-D1-D2 ITC shall be available
- 18. 1. E = Exempt supplies during the tax period i.e., during October month in our example. F = Total turnover in state during the tax period i.e., during October month in our example Important: in for any reason, information regarding E & F are not available for October month, then values of preceding month can be taken. Main Part of Rule 42©ShashankGupta[B.Com,FCA] Notes: - 2. VAT and excise duty shall not be added while calculating turnover.
- 19. Suppose Total credit for October month is Rs. 10,000 out of which T1 (non-business use) is Rs. 500, T2(exempt) is Rs. 1,000, T3 (Blocked credit) is Rs. 1,500, T4 is Rs. 6,900. So, one to one correlated credit i.e., T1+T2+T3+T4 is Rs. 9,900. therefore, common credit i.e. C2 is Rs. 100 i.e. 10,000-9,900. Exempt outward supply during October month (E)=50,000 and Total turnover in state during October month (F)=2,50,000. So, D1 = 20 i.e., 100*50,000/2,50,000 and D2 = 5 i.e., 100*5%. Now why Rule 42 wants to add D1 & D2 i.e., 20+5 = 25 in output tax liability rather than saying to take ITC of only Rs. 75 i.e. 100- 20-5. Here, it becomes crucial to understand why the law maker had forced to calculate C1? C1 = 7,000 i.e. 10,000-500-1000-1500 Rule 42 says that C1 shall be credited to electronic credit ledger i.e. indirectly Rule 42 had credited the full amount of common credit i.e. C2 to the electronic credit ledger. That’s why D1 and D2 have been added to output tax liability. Critical analysis of Rule 42 ©ShashankGupta[B.Com,FCA] Q. Why Rule 42 wants to add D1 & D2 in output tax liability rather than saying for not to take ITC for them ?
- 20. Critical analysis of Rule 42 ©ShashankGupta[B.Com,FCA] Q. Why Rule 42 wants to add D1 & D2 in output tax liability rather than saying for not to take ITC for them ? Form GSTR-3B
- 21. Bird’s eye view of Rule 42 inward supplies of input and input services One to one correlation i.e. correlation identifiable at invoice level. Possible combinations If used for taxable outward supplies [T4] ITC available If used for Zero rated outward supplies [T4] ITC available If used for exempt outward supplies or non-taxable outward supplies [T2] ITC not available If used for Non- business purpose [T1] ITC not available Blocked Credit related goods and services [17(5)] [T3] ITC not available No one to correlation i.e. correlation not identifiable at invoice level Remaining commonly used goods and services [C2] Proportionate exempt part D1 = C2*E/F addition in output tax liability Proportionate non-business part D2 = C2*5% addition in output tax liability Remaining part i.e. business + taxable i.e. balance i.e. C3=C2-D1-D2 No separate treatment because C1 has already been credited to Credit ledger
- 22. Annual Calculations of D1 & D2©ShashankGupta[B.Com,FCA] Why is annual calculation is necessary? Following factors may change when are aggregated for whole financial year. • C2 • E • F If any of the above said factors changes, D1 & D2 shall get changed accordingly.
- 23. Annual Calculations of D1 & D2©ShashankGupta[B.Com,FCA] Impacts of annual calculations D1 & D2 may be on higher side Difference shall be added to output tax liability along with interest D1 & D2 may be on lower side ITC shall be taken by 20th October of next financial year or actual date of filing of relevant annual return, whichever is earlier
- 24. Discussion on sale of land/building ©ShashankGupta[B.Com,FCA] check whether inward supply actually used for sale of land/building
- 25. ©ShashankGupta[B.Com,FCA] interest received/receivable on fixed deposit/loans - shall not be included in exempt supplies [Explanation to Rule 43]
- 26. ©ShashankGupta[B.Com,FCA] Sale of MEIS license, SEIS License or other duty scrips – nit is undoubtedly an exempt supply but ITC need not be apportioned because inward supplies would not have been used for their sale. (My personal opinion)
- 27. Rule 43 (Please watch next video)