Conditions To Claim - ITC Rules For Common Credit Under GST
Conditions To Claim - ITC Rules For Common Credit Under GST

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Date: 19 Sep 2022


Input Tax Credit On Common Credit

What is Common Credit?

A company may get capital goods, input commodities, and input services from outside sources. Additionally, the goods and services brought in may be employed for either private or commercial purposes. Under GST, the aggregate input tax credit offered on all such purchases is referred to as the Proportionate Credit or Common Credit. The taxpayer is not eligible to claim credit for inputs utilised for private purposes. Thus, the common credit should be applied proportionately when paying the production tax liability.

The common credit can be utilised under two fundamental criteria: First, ITC is permitted only for commercial purposes. ITC cannot be claimed for the personal use of goods and services. Second, ITC is eligible for selling taxable goods and services.ITC does not apply to exempted supplies.

How to Calculate Common Credit?

To calculate common credit, let’s consider the following example:

  • Total Input Tax available in the tax period (T) – Rs 2,00,000 

  • Input Tax for inputs exclusively for personal purpose (T1) – Rs 6,000 

  • Input Tax for inputs exclusively for agricultural activity (purchasing seeds, soil, labour charges) (T2) – Rs 30,000 

  • Input Tax for inputs and services on which availing credit is not eligible (T3) - Rs 10,000 

  • Input Tax for inputs (transporting charges) for taxable items (T4) – Rs 20,000 

  • Value of taxable items sold in Riya’s shop – 6,00,000

  • Value of vegetables sold (Agricultural activity) – 3,00,000

Riya’s total input tax will be distributed in four parts:

  1. Personal supplies- T1

  2. Exempted supplies- T2

  3. Non-eligible ITC- T3

  4. Normal Taxable sales- T4

First, let’s calculate the total eligible ITC

Using the formula C1 = Total ITC - (ITC for personal supplies + Non-eligible ITC)         

C1 = T - (T1+T2+T3)

C1 = 2,00,00 - ( 6,000 + 30,000 + 10,000)

    = Rs 1,54,000

The whole qualified credit is calculated in this phase to determine the available credit. This is obtained by eliminating all ITC from personal, exempt, and non-eligible inputs. This sum will be added to the digital ledger. In the GSTR-2, you must reverse the common ITC for personal supplies, exempt goods, and ineligible supplies.

The next step is to calculate ITC pertaining to personal and exempt supplies.

Common Credit (C2) = ITC credited to the e-ledger (C1) - ITC for taxable supplies (T4) 

C2 = C1- T4

     = 1,54,000 - 20,000

     = Rs 1,34,000

This demonstrates how taxable, personal, and exempt supplies must distribute the common credit. It can be the shop's rent in our scenario. The shop's GST portion will be reversed. There will be three sections to this Common Credit: Partly personal, partly exempted, and Normal portion.

  1. Partly exempted

The following formula is used to determine the fraction of ITC related to exempted supplies:

D1 = (Exempted turnover divided by Total turnover) x Common Credit

    = (3,00,000/ 6,00,000) x 1,34,000

     = Rs 67,000

The formula uses the proportional technique to determine the amount. Vegetable-related ITC in the amount of Rs 67,000 is assumed to apply to exempt supplies and must be reversed in GSTR-2.

  1. Partly personal

Many regular costs, like rent, power, and water bills, are incurred for personal and professional reasons. Using this formula, you can separate the credit amount for personal use. 

D2 = 5% of Common Credit. 

As a result, D2 = 5 % of 1,34,000

                          = Rs 6,700

In order to compute the amount, the formula assumes that 5% of the inputs are used for personal gain. It is required to reverse the amount of Rs. 6,700 in GSTR-2 as it is considered ITC for personal supplies.

  1. Normal Portion

The amount of common credit related to the taxable supplies is then calculated (such as the rent portion for the shop). 

Common Credit (C3) = C2 - [ITC on exempt materials (D1) + ITC portion for personal supplies (D2)]

                                     = 67,000 + 6,700 = Rs. 73,700 

This represents the widespread credit owed to regular supplies.

Finally, in the third step, we need to calculate the total ITC one can claim.

Total eligible ITC for the month = ITC for normal supplies + Common credit for normal supplies 

Thus, 

Total eligible ITc for the month = 20,000 + 73,700

                                                     = Rs 93,700

How does calculating ITC impact your Annual Return?

It is necessary to calculate the total ITC for the year according to the annual return, as shown in the GSTR-2 format. If the total ITC claimed during the year exceeds the ITC of the annual return, there will either be a refund or interest, depending on the circumstances. The exact computations must be performed for the entire fiscal year before the end of the annual return filing deadline.

Let's assume that the computations above are different from the total eligible credit in the following ways:

In the first instance, ITC, as claimed on the annual return for 2017–18, is more than the actual amount.

The total credit available at the year-end is 1,00,000. In this case, a credit of (1,00,000 - 93,700) = Rs 6,300 may be claimed for any month prior to September 2018.

In another instance, The ITC claimed that the 2017–18 annual return is lower than the actual amount.

The total allowable credit at the year's end is 50,000. Here, the output tax liability will be increased by (93,700 - 50,000) = Rs 43,700, and interest at an 18% rate will be due from April 1, 2018, until the date of actual payment.

The calculations above show that to avoid interest and other recovery mechanisms, the ITC Rules for Common Credit under GST were intended to be carefully adhered to.