Guidelines for Managing Common Input Tax Credit Under GST
This article elucidates the concept of common credit under GST, which arises when inputs and services are utilized for both business and personal or exempted purposes. It highlights the importance of accurately segregating eligible Input Tax Credit (ITC) to avoid claiming credit on non-business or exempted activities. The piece provides a detailed, step-by-step example for calculating and reversing common credit, explaining how different types of supplies impact the final claimable ITC. Furthermore, it clarifies the implications of these calculations on annual GST returns, including potential refunds or interest liabilities, emphasizing the necessity of strict compliance with common credit regulations.
According to the Goods and Services Tax (GST) framework, businesses are permitted to claim an Input Tax Credit (ITC) solely for goods and services utilized in their commercial operations. This condition is explicitly stated in Section 16 of the CGST Act, which outlines the criteria for ITC eligibility. However, taxpayers frequently use certain inputs for both personal and business activities. For instance, engaging a chartered accountant for both personal income tax filing and a business tax audit involves credit used for dual purposes. This raises the question of whether the full amount paid in such scenarios is eligible for ITC. This article explores the guidelines for handling such common credits.
What is common credit under GST?
Common credit under GST refers to the Input Tax Credit (ITC) claimed when a taxpayer utilizes the same assets or inputs for both their business and personal needs. For example, consider Ms. Anita, who operates a grocery store. She leases a two-story building, dedicating the ground floor to her business and residing on the first floor. In this situation, the GST paid on the rent qualifies as common credit. She can claim ITC only for the portion of the rent that directly relates to her business activities. Furthermore, if Ms. Anita also cultivates vegetables on adjoining land for sale in her shop, the property is used for three purposes: taxable sales (groceries), exempted sales (vegetables), and personal use (residence). Although she can claim ITC for business expenses, some costs, like rent, serve both business and non-business functions, thus falling under common credit.
Why is common credit important?
The concept of common credit is significant because Input Tax Credit (ITC) is strictly limited to business-related expenditures. Many businesses share inputs for both commercial and personal use. It is crucial for taxpayers to understand that ITC cannot be claimed for personal expenses. Additionally, since goods exempted under GST are already zero-rated, claiming ITC for inputs associated with these exempted goods would result in an unintended 'negative taxation' scenario. Therefore, ITC related to exempted goods must also be excluded. The process of calculating common credit helps segregate the ITC attributable to personal and exempted supplies, leaving only the portion applicable to taxable supplies. This eligible amount can then be claimed during GST return filings. Any credit linked to personal or exempted supplies must be reversed in Table 4 of GSTR-3B. Further information on the reversal process in GSTR-3B is available.
Types of ITC
Input Tax Credit can be categorized based on its usage: some ITC is exclusively for taxable supplies, some for exempted supplies, and some for personal consumption. A fourth category, known as common credit, applies when inputs and services are used for a mix of taxable, exempted, and personal purposes.
Calculating Common Credit
Understanding common credit calculations is best illustrated with an example. Consider the following hypothetical details for May 2024 for Ms. Anita:
- Total Input Tax available: INR 1,00,000 (T)
- Value of taxable items sold: INR 5,00,000
- Value of vegetables sold (exempted agricultural activity): INR 2,00,000
- Input Tax for inputs exclusively for taxable items (e.g., transporting charges): INR 10,000 (T4)
- Input Tax for inputs exclusively for agricultural activity (exempted supplies, e.g., seeds, soil, labor): INR 20,000 (T2)
- Input Tax for inputs exclusively for personal purposes (e.g., dining out): INR 5,000 (T1)
- Input Tax for ineligible inputs and services (e.g., travel by ride-sharing to wholesalers, which is blocked credit): INR 10,000 (T3)
Step 1: Determine the Total Eligible Input Tax Credit
The first step involves calculating the total eligible ITC, denoted as C1. This is achieved by subtracting ITC attributable to personal supplies, exempted supplies, and non-eligible ITC from the total available ITC.
Formula: C1 = T - (T1 + T2 + T3)
Calculation: C1 = 1,00,000 - (5,000 + 20,000 + 10,000) = 65,000
This calculated amount represents the total eligible credit that will be posted to the electronic credit ledger. The common ITC for personal, exempt, and non-eligible supplies must be reversed in GSTR-3B.
Step 2: Identify ITC Pertaining to Personal and Exempt Supplies
Next, calculate Common Credit C2, which is the portion of ITC to be allocated among taxable, personal, and exempt supplies.
Formula: C2 = C1 - T4
Calculation: C2 = 65,000 - 10,000 = 55,000
This value, C2, represents the common credit that needs to be distributed. In our example, this could be the GST component of the building's rent. The GST pertaining to the residence portion would be reversed. This common credit is further categorized into three parts:
Step 2.1: Portion for Exempted Supplies (D1)
The ITC portion for exempted supplies is determined using a proportionate method based on the value of exempted and total turnover.
Formula: D1 = (Value of Exempted Supplies / (Value of Taxable Supplies + Value of Exempted Supplies)) * C2
Calculation: D1 = (2,00,000 / (5,00,000 + 2,00,000)) * 55,000 ≈ 15,714
The amount of INR 15,714 is considered the ITC attributed to exempted supplies (vegetables) and requires reversal in GSTR-3B.
Step 2.2: Portion for Personal Supplies (D2)
For common expenses shared between business and personal use (like rent or utility bills), a fixed percentage is used to determine the personal portion of the credit.
Formula: D2 = 5% of Common Credit
Calculation: D2 = 5% of 55,000 = 2,750
This formula assumes 5% of common inputs are for personal use. The amount of INR 2,750 is deemed the ITC related to personal supplies and must be reversed in GSTR-3B.
Step 2.3: Normal Portion (C3)
Finally, we calculate the portion of common credit that pertains to taxable supplies, such as the shop's share of rent.
Formula: C3 = Common Credit - (D1 + D2)
Calculation: C3 = 55,000 - (15,714 + 2,750) = 36,536
This is the common credit directly attributable to normal, taxable supplies.
Step 3: Calculate Total Claimable ITC
Total eligible ITC that can be claimed for the month combines the ITC exclusively for normal supplies and the common credit allocated to normal supplies.
Formula: Total eligible ITC = ITC for normal supplies (T4) + Common credit for normal supplies (C3)
Calculation: Total eligible ITC = 10,000 + 36,536 = 46,536
Impact on Annual Return Filing
The data regarding availed ITC from Table 4A of GSTR-3B is automatically populated into Table 6A of GSTR-9 and is not editable. Similarly, all common credit reversal details must be reported in Table 7 of GSTR-9. Discrepancies between the annual return's ITC and the total ITC claimed throughout the year can lead to a refund or an interest liability, which is documented in Tables 12 and 13. These common credit calculations must be performed for the entire financial year before the annual return filing deadline.
Consider these scenarios where the total eligible credit at year-end differs from the monthly calculations:
Example 1: Annual ITC is greater than monthly claims (2023-24)
If the total eligible credit at year-end is INR 50,000, and the amount claimed monthly was INR 46,536, then the difference of INR 3,464 (50,000 - 46,536) can be claimed as credit for any month before November 2024.
Example 2: Annual ITC is less than monthly claims (2023-24)
If the total eligible credit at year-end is INR 30,000, but INR 46,536 was claimed monthly, the excess of INR 16,536 (46,536 - 30,000) will be added to the output tax liability. An interest of 18% per annum will be applicable from April 1, 2024, until the actual payment date.
These examples underscore the importance of adhering strictly to GST rules for common credit to avoid interest payments and potential recovery actions.
For further reading, consider information on Input Tax Credit under GST - Conditions To Claim.