GST Update on Practical Example Of Rule 8 Of ITC Pertaining To Credit Reversal For Capital Goods

In our earlier update, we discussed the provision contained in Rule 8 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 8 with the help of an example. As stated in our earlier update, the calculation is to be separately made for each of the capital goods which are commonly used in business/non-business purposes or in effecting taxable and exempt supplies both.

Assuming that the GST will be implemented w.e.f. 01.06.2017, the facts of our example are as follows:-
M/s XYZ Pvt. Ltd. has purchased capital good say ‘P’ valuing Rs. 2,00,000/- on 02.07.2017 after implementation of GST wherein IGST paid was 18%. Hence, the credit of IGST taken was Rs. 36,000/-. This capital good ‘P’ will be used for effecting both taxable and exempt supplies.

At the same time, M/XYZ Pvt. Ltd. also has another capital good say ‘Q’ purchased on 01.04.2015 for Rs. 1,00,000/- on which excise duty was paid @ 12.5% and the credit taken was Rs. 12,500/-. This capital good was exclusively used in manufacture of taxable goods and 100% credit was allowed under Cenvat Credit Rules, 2004 but this capital good will be partly used for effecting exempted supplies under GST regime. Hence, as per Rule 8, credit based on residual life will be added in the output tax liability of M/s XYZ Pvt. Ltd. It is also stated that the turnover of exempted supplies during the tax period (being July, 2017) is Rs. 75,000 and turnover of taxable supplies during the said period is Rs. 25,000.

As stated earlier, the computation of common credit to be added in the output tax liability pertaining to exempted supplies will be computed separately for capital good ‘P’ and ‘Q’ separately.
The computation of credit reversal in case of ‘P’ will be as follows:-
Common credit for the tax period July, 2017= 36,000/60 = Rs. 600/- per month for the useful life
Common credit pertaining to exempted supplies= 600*75000/100000
= Rs. 450/-
The amount of Rs. 450/- will be added to the output tax liability of M/s XYZ Pvt. Ltd. every month upto its useful life being 01.07.2022.
The computation for credit reversal in case of ‘Q’ will be as follows:-
Calculation of common credit based on reduction of 5% points for every quarter or part thereof-
Total number of quarters from 01.04.2015 to 01.07.2017 = 10 Quarters
Common credit= 12500-(10*5%) = Rs. 6,250/-
Common credit during residual life remained= 6250/36 = Rs. 174/-
Remaining residual life is number of months from 01.07.2017 to 30.06.2020 as the five years from 01.04.2015 comes to 30.06.2020.
Common credit pertaining to exempted supplies= 174*75000/100000
= Rs. 130 to be added to the output tax liability upto 30.06.2020.

The above example clearly reveals the complexity of the calculation to be made with respect to every capital good. Moreover, the assessee is also required to track the remaining useful life of capital assets as the credit will be added to the output tax liability of the assessee 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 8 will be really a tough task for the assessees in the GST regime.

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GST Update on Practical Example Of Rule 8 Of ITC Pertaining To Credit Reversal For Capital Goods

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