When is Input Tax Credit (ITC) Reversal Mandatory?
Claiming Input Tax Credit is subject to strict statutory conditions under the CGST Act. In specific scenarios where goods/services are not used for business purposes or payments are delayed, taxpayers must legally reverse previously claimed ITC along with interest.
Rule 37: 180 Days Non-Payment to Supplier
Under the second proviso to Section 16(2), if a buyer fails to pay the supplier the invoice value along with GST within 180 days from the invoice date, the buyer must reverse the corresponding ITC in GSTR-3B for the tax period following the 180 days, along with 18% interest under Section 50.
Note: Once payment is subsequently made to the supplier, the taxpayer is fully eligible to reclaim the reversed ITC without any time restriction.
Rule 42 & Rule 43: Common Credit Apportionment
- Rule 42 (Inputs & Input Services): If goods/services are used partly for business and partly for personal use, or partly for taxable supplies and partly for exempt supplies, ITC must be apportioned proportionately.
- Rule 43 (Capital Goods): Applies to machinery and assets over a useful life of 60 months (5 years) when used for both exempt and taxable supplies.
Section 17(5) Blocked Credits
ITC is strictly blocked on motor vehicles for passenger transport (<13 seats), food and beverages, outdoor catering, health insurance, and personal club memberships, unless used for qualifying commercial lines.