GST Update on Practical Example Of Rule 7 For Credit Reversal Of Common Inputs/Input Services

In our earlier update, we discussed the provision contained in Rule 7 with respect to Cenvat Credit Rules, 2004 presently in force and the complexity it will bring in compliance by the assessees. In this update, we will explain the computation to be made under Rule 7 with the help of an example. As stated in our earlier update, the calculation is to be separately made for Central Tax, State Tax, Union Territory Tax and Integrated Tax. For the sake of simplicity, it is assumed that the entire input tax credit pertains to IGST.
The facts of our example are as follows:-
M/s PQR Pvt. Ltd. is engaged in manufacture and supply of two products, being A (exclusively exempted from levy of GST) and B which is leviable to GST. The turnover of product A during the tax period is Rs. 2,50,000/- and turnover of product B during the tax period is Rs. 10,00,000/-. The total tax credit of IGST is Rs. 70,000/- out of which IGST credit pertaining to various purposes is as follows:-
Other than business purpose = Rs. 2,000/-
Tax credit pertaining to product A = Rs. 10,000/-
Rent-a-cab credit = Rs. 3,000/-
Tax credit pertaining to product B = Rs. 25,000/-
The computation of credit which is required to be added in the output tax liability of M/s PQR Pvt. Ltd. is as follows:-
The amount of common tax credit is calculated as follows:-
Total Credit-Credit pertaining to non-business use-credit pertaining to A- Rent a cab credit -credit pertaining to B
=70000-2000-10000-3000-25000
= 30,000
As per the proposed provisions in GST Law, credit which will be added to the output tax liability will comprise of credit pertaining to exempted supplies and credit pertaining to non-business use specified as 5% of common credit.
The common credit pertaining to exempted supplies = 30000*250000/1000000
= Rs. 7,500/-
The common credit pertaining to non-business use= 30000*5%
=Rs. 1,500/-
The common credit required to be added to the output tax liability is Rs. 9000 (7500+1500)
The above example clearly reveals the complexity of the calculation to be made by assessee. Moreover, the assessee is required to make computations for the tax period, which is although not clarified but it is likely to be on monthly basis which will be very difficult to implement practically. It is also worth mentioning that even bifurcation of CGST, SGST is to be made which is not taken in the present example as IGST was considered to make the example easy. Hence, the compliance under Rule 7 will be really a tough task for the assessees in the GST regime.

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GST Update on Practical Example Of Rule 7 For Credit Reversal Of Common Inputs/Input Services

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