Understanding Input Tax Credit Reversal for GSTR-3B and GSTR-2 Filings

Under the Goods and Services Tax (GST) regime, businesses can offset taxes paid on their purchases (inputs) against the taxes they owe on their sales (outputs). To be eligible for this Input Tax Credit (ITC), certain criteria must be met:

• The supplier must be paid within 180 days from the invoice date.
• Inputs and capital goods cannot be utilized for personal use.
• Inputs and capital goods must not be employed in supplying exempt goods or services.

Failure to satisfy these conditions means you cannot claim ITC on the taxes paid for inputs. Since these purchases are automatically reflected in GSTR-2A and GSTR-2B, any ineligible credit must be reversed during the GSTR-3B filing process. Historically, GSTR-2 served this function until its suspension in September 2017, after which GSTR-3B became the relevant form.

Recent Legislative Changes

Budget 2025: February 1st, 2025

1. The Finance Minister revised Section 34(2) of the CGST Act, 2017, clarifying the mandatory reversal of Input Tax Credit (ITC) corresponding to a credit note. This means if a supplier issues a credit note that reduces their tax obligation, the recipient must reverse any ITC previously claimed for that transaction.

2. Revisions to Section 38(1) of the CGST Act, 2017, remove the term "auto-generated," suggesting that the GSTR-2B ITC statement might no longer be solely system-generated. Businesses may now be required to independently verify and reconcile invoices and ITC using an Invoice Management System (IMS) instead of solely trusting automated data. Additionally, a new clause (c) in Section 38(2) empowers the government to prescribe further details for the ITC statement via rules.

Input Tax Credit Reversal within GSTR-3B

All categories of ITC reversals are reported in Table 4(B) of the GSTR-3B form.

1. As per CGST Rules 42 and 43, input credit must be reversed for goods and services partially used for non-business purposes. Reversal is also necessary when supplies encompass a mix of taxable, exempt, and nil-rated products. For capital goods employed in making taxable, exempt, or nil-rated supplies, the associated ITC must be apportioned and reversed for the portion not used for business activities.

2. The "Others" category covers any additional ITC that needs to be reversed in the taxpayer's accounting records.

GSTR-2B indicates the eligibility of specific Input Tax Credits. If an ineligible ITC has been claimed, the taxpayer is mandated to reverse it in GSTR-3B.

Input Tax Credit Reversal in GSTR-2 (Historical Context)

Historically, Table 11 of the GSTR-2 form detailed Input Tax Credit (ITC) reversals, as outlined below:

ITC on Inward Supplies

This refers to 11.A.(a) – Amount in terms of rule 37(2) in GSTR-2. As a dealer, you would have claimed ITC on inward supplies. However, if the invoice amount is not paid to the supplier within 180 days, the ITC must be reversed. If only a portion of the invoice is paid, the ITC reversal will be proportionate. The reversed ITC is then added to the output liability. The amount reversed should be categorized into IGST, CGST, SGST, and Cess, and entered in columns 3, 4, 5, and 6 respectively.

For instance, Mr. A received goods on July 1, 2017, valued at Rs.10,000, with GST of Rs.1,800. Mr. A claimed this Rs.1,800 as ITC in his GSTR-2. If Mr. A failed to pay the invoice amount by December 2017, he would need to reverse the Rs.1,800 ITC when filing his GSTR-2 for December 2017 in January 2018.

Credit Note Issued to Input Service Distributor (ISD)

This section corresponds to 11.A.(b) – Amount in terms of rule 39(1)(j)(ii). When an Input Service Distributor (ISD) receives a credit note from a supplier, the ITC previously distributed must be reversed. The dealers who received this credit are also required to reverse their respective ITC shares. This reversal should be proportional to the original ITC distribution by the ISD, and the reversed ITC is added to the output liability. This amount must also be segregated into IGST, CGST, SGST, and Cess, and recorded in columns 3, 4, 5, and 6.

For example, M/s X received services worth Rs.1,00,000, incurring a GST of Rs.18,000. M/s X distributed this credit to dealers A and B in a 1:2 ratio. Both A and B claimed the ITC in their GSTR-2. If M/s X later receives a credit note for Rs.23,600 (including Rs.3,600 GST), A and B must reverse this Rs.3,600 GST in the same 1:2 ratio. A would reverse Rs.1,200 (Rs.3,600 * 1/3), and B would reverse Rs.2,400 (Rs.3,600 * 2/3). Both A and B would include these reversals in the ITC reversal section of their GSTR-2.

ITC on Input Supplies Partially Used for Business, Exempt Supplies, or Personal Use

This section relates to 11.A.(c) – Amount in terms of rule 42(1)(m). Any ITC associated with exempt supplies or personal use must be reversed in GSTR-2. The ITC to be reversed is added to the output liability and must be segregated into IGST, CGST, SGST, and Cess, then entered into columns 3, 4, 5, and 6.

Calculating ITC Reversal for Exempt Supplies:

Step 1 – Determine Common Credit

Common Credit = Total ITC on Input Supplies Less: ITC on supplies used for Personal purposes Less: ITC on supplies used for providing exempt supplies Less: ITC on which credit is not available Less: ITC on supplies other than exempted but including zero-rated supplies (ITC on normal supplies)

Essentially, common credit is the ITC on inputs that are partially used for exempt supplies or personal consumption.

Step 2 – Calculate Reversal Amount for Exempt Supplies

Amount of ITC reversal attributed to inputs partly used for Exempt supplies = (Value of Exempt Supplies * Common Credit) / Total Turnover in the State.

Calculating ITC for Personal Use:

5% of the Common Credit.

Both these calculated ITC amounts must be reversed in the dealer's GSTR-2 filing.

ITC on Capital Goods Partially Used for Business, Exempt Supplies, or Personal Use

This relates to 11.A.(d) – Amount in terms of rule 43(1)(h). ITC on capital goods used for exempt supplies and non-business purposes also requires reversal. The calculation process is similar to that for ITC on inputs used for exempt supplies and personal use.

Step 1 – Determine Common Credit

Common Credit = ITC on Capital Goods Less: ITC on capital goods put to personal use Less: ITC on capital goods used for exempted goods Less: ITC on capital goods used in supplies other than exempted but including zero-rated supplies (ITC on normal supplies)

Step 2 – Calculate Reversal Amount for Exempt Supplies and Personal Use

Amount of ITC reversal attributable to capital goods partly used for Exempt supplies and Personal use = (Value of Exempt Supplies * Common Credit) / Total Turnover in the State.

Step 3 – Monthly Reversal Calculation

This ITC reversal must be performed monthly, considering an asset life of 5 years. Therefore, the monthly ITC reversal amount will be = Amount calculated in Step 2 / 60 (months). The reversed ITC must be added to the output liability, specified in column 2, and further segregated into IGST, CGST, SGST, and Cess in columns 3, 4, 5, and 6.

When Reversal of ITC for Exempted/Non-Business Use Exceeds Annual Reversals

This addresses 11.A.(e) – Amount in terms of rule 42(2)(a). After filing the annual return (GSTR-9), if the total ITC on inputs used for non-business or exempt supplies is found to be greater than the total ITC reversed in GSTR-2 during the year, the difference must be reversed in GSTR-2. This differential amount will be added to the output tax liability and segmented into IGST, CGST, SGST, and Cess in columns 3, 4, 5, and 6.

When Annual ITC Reversals Exceed ITC for Exempted/Non-Business Use

This refers to 11.A.(f) – Amount in terms of rule 42(2)(b). This scenario is the inverse of the previous point, where only one of these two conditions will apply. In this case, the excess ITC reversed can be reclaimed, and the amount should be deducted from the output liability. The reclaimed ITC must be segregated into IGST, CGST, SGST, and Cess.

Payment of ITC Reversal Added to Output Tax Liability

This section covers 11.(A).(g) – On account of the amount paid subsequent to reversal of ITC. All ITC reversals that increase output tax liability require payment, which must be reported here. The tax paid needs to be categorized by IGST, CGST, SGST, and Cess.

Amendments to Prior ITC Reversal Information

This refers to 11.(B) – Amendment of information furnished in Table No 11 at S. No.A in earlier return. Since GSTR-2 cannot be revised, any adjustments to previously reported reversals must be declared in this section.