Reversal of Input Tax Credit in GSTR 2

What is the Reversal of Input Tax Credit in GSTR-2?

The tax already paid by the customer at the time of purchase of goods and services is eligible for deduction from the tax amount is known as input tax credit. Reversal of input tax credit is a type of situation where the taxpayer has to reverse the tax credit claimed by him/her earlier. This can happen due to various reasons such as if the goods and services for which ITC was claimed were used for non-business purposes, or if the supplier did not pay the tax to the government. In such situations, the taxpayer can reverse the credit and pay the tax due to the government.

What are the Conditions for Reversal of ITC in GST?

Given below are the conditions for the reversal of ITC in GST -

• If the recipient does not pay the required amount to the supplier. In such a case, ITC reversal needs to be done within 180 days from the date of invoice.
• The GST amount of the purchased capital goods is claimed as depreciation under the Income Tax Act.
• An exempt supply has been made using certain materials by following the calculation for common credits regularly (every month or year). If these materials are only used for exempt supply, they need to be reversed as soon as soon as it is found that a claim has been made.
• Some materials used to make supplies were later used for non-business or personal reasons. We need to reverse to use the regular calculation for common credits (monthly or annually).
• When canceling the GST registration, a reversal of the Input Tax Credit (ITC) should be claimed.
• Banks and other financial institutions may reverse 50% of ITC based on specific rules. This reversal needs to be claimed when submitting regular returns.
• For blocked credits, ITC has been utilized. The reversal should be claimed while submitting regular returns before the yearly return deadline.
• Materials used in products given away as free samples can be reversed when filing regular returns for the month in which those free samples were distributed.
• You can claim a reversal for materials used in goods that were stolen, lost, or damaged when filing regular returns for the month the loss occurred.

What are the Eligibility Criteria for IT Returns in GST?

Any registered taxpayer is eligible to claim ITC upon fulfilling the following conditions -

• If the payment to the supplier of goods and services is made within 180 days of issuing the invoice.
• Capital goods and inputs have not been used for personal benefit.
• If the GST returns have been filed on time.
• Exempted supplies are not provided using capital goods or inputs.

How to Calculate ITC?

Here’s an example to help you understand the calculation of ITC better -

A steel manufacturer, Mr.X, purchased raw steel for Rs.500 to make raw steel plates and glasses. He spends another Rs.100 on the purchase of more raw materials. Assume that the GST on steel is 18% of the amount and the GST on other raw materials is 28%. Therefore, the GST on raw steel will be Rs.90 and the GST on other materials will be Rs.28. Therefore, the total GST on raw steel and other goods paid by Mr.X is Rs.118.

Mr. X decides to sell his goods at Rs.800 plus GST, after considering all the costs of producing steel plates and glasses. Mr.X generates an invoice of Rs.944 for the sale of steel plates and glasses if the tax on steel utensils is 18%. Therefore, the total tax on his goods becomes Rs.144.

Since Mr.X has already paid Rs.118 as GST at the time of purchasing the raw materials, he can now deposit the difference of Rs.26 with the government after subtracting Rs.118 already paid toward input GST from the total amount i.e. Rs.144. Distributors and retailers can claim input tax credits of the same at all subsequent levels.

ITC Reversal in GSTR-3B?

Table 4(B) within the GSTR-3B form specifically addresses the reversal of Input Tax Credit (ITC) across various categories.

As stipulated by CGST Rules 42 and 43, if goods and services' input credit is utilized for both business and non-business purposes, a reversal is mandatory. This requirement extends to situations where supplies encompass taxable, exempt, and nil-rated products, necessitating the reversal of input credit. Additionally, when capital goods contribute to both taxable and exempt or nil-rated supplies, a proportionate allocation and reversal are imperative for the unused portion of the business.

Furthermore, any other ITC subject to reversal in the taxpayer's accounting records falls under this category. The GSTR-2B serves as a resource to determine the eligibility of a specific ITC for claims. If an ITC is ineligible but has been availed, the taxpayer is obligated to reverse it in the GSTR-3B form.

How to Report ITC Reversal in GSTR-2?

ITC reversal can be reported in GSTR-2 in the following way -

• Non-Payment to Suppliers - Details of the invoices that have not been paid within 180 days of the date of invoice have to be reported in Table 4 of the GSTR-2. The amount of ITC that has been claimed on those invoices needs to be reported in Table 5 of GSTR-2.
• Non-Filing of GSTR-1 - The details of suppliers who have not filed their GSTR-1 for 2 consecutive months have to be reported in Table 4 of GSTR-2. The ITC amount claimed for those invoices has to be reported in Table 5 of GSTR-2.
• Non-business Use - The details of those goods that were used for non-business purposes have to be reported in Table 6 of the GSTR-2. Similarly, the ITC claimed on those goods and services have to be reported in Table 5 of the GSTR-2.
• Exempt Supplies - The details of services and goods that are not eligible for input tax credit should be reported in Table 4 of GSTR-2 and the amount of ITC claimed should be reported in Table 5 of GSTR-2.

The reversal of input tax credit is a vital requirement for businesses to adhere to. Businesses should ensure that they comply with all the rules and regulations related to the reversal of ITC. It is also necessary for businesses to make the necessary reporting in GSTR-2 to avoid penalties and interest. However, if you are a small or medium business owner, you should consider seeking advice from professional tax experts.

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