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360 degree analysis of Rule 43 of GST |
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360 degree analysis of Rule 43 of GST |
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Determination and apportionment of input tax credit in respect of capital goods (Critical analysis of Rule 43 of Central Goods and Services Tax Rules, 2017) Input tax credit (the ITC) is the backbone of GST. In GST law as prevalent in India, on referring section 73 and section 74 of CGST Act, 2017 (the Act), one would appreciate that wrong availment of ITC is being treated as offence irrespective of it’s actual utilization. In this article, rule 43 of CGST Rules, 2017 (the Rules) has been thoroughly discussed and critically analyzed so as to enable every reader to use this article as a ready reference. Rule 43 talks about ITC in respect of capital goods, so reference to any section in this article has been modified accordingly to concentrate on capital goods only. There are certain errors in drafting of rule 43, which we see with the flow of discussion. Issues to be analyzed
all above issues has been analyzed in this article at length at relevant places in form of discussion. Emergence of rule 43 and principles embedded therein Section 17(1) and section 17(2) are cause of creation of rule 43. Section 17(1) intends that ITC in respect of capital goods shall not be available to the extent these are used for non-business purposes. Similarly, section 17(2) intends that ITC in respect of capital goods shall not be available to the extent these are used for effecting exempt outward supplies. So, rule 43 is based on following principles –
Since this a settled position of law that a rule cannot override the provisions of Act, so in addition to above, ITC in respect of those capital goods shall also not be available which falls within the scope of section 17(5). This point has been focused specifically because rule 43 is silent on ITC of such capital goods. An express assumption taken by rule 43 (for commonly used capital goods) a capital goods has a life of 5 years i.e. 60 months i.e. 20 quarters. So, ITC in respect of a capital goods shall be available over a period of 5years / 60months / 20 quarters. Rule 43 specifically uses 5% per quarter. An implied intention of rule 43 When we compare rule 43 with rule 42, there is no provision for annual calculation in rule 42 as is there in rule 42. So, rule 43 has been drafted in such a manner that calculation of credit for a particular month must be accurate and final within that period itself. In other words, it can be concluded that as soon as a tax period (i.e. month) is over, self-assessment of 1/60th of the credit is over. Now one doesn’t need to see this 1/60th part in next tax period(s). similarly, one can conclude that as soon a quarter is over, self-assessment of 5% is over. Rule 43 one step further clarifies that a part of quarter shall be treated as complete quarter. Some other aspects relevant for understanding rule 43 One can take credit in respect of a capital goods as soon as four conditions as specified in section 16(2) are fulfilled, if otherwise is not ineligible for credit. Let’s analyze above concepts Situation-1 Suppose a capital goods was purchased and received on 20.07.2017 along with invoice of even date. IGST charged on invoice was ₹ 6,60,000. Till December 2017, it was being used for effecting exempt supplies. But from January 2018 to June 2018, it was used commonly for effecting taxable supplies, exempt supplies and for the purpose of business as well as non-business purpose. From July 2018 to September 2018, it was used exclusively for effecting taxable supplies.
Since upto December 2017, it was being used for effecting exempt supplies, ITC would have not been taken upto December 2017. Monthly proportionate ITC = Tax ÷ 60 = 6,60,000 ÷ 60 = 11,000 ITC finalized upto December 2017 = monthly proportionate ITC × number of months lapsed =11,000 × (months from July 2017 to December 2017) = 11,000 × 6 = 66,000 So, out of ₹ 6,60,000, self-assessment of ITC of ₹ 66,000 has become final. In other words, since it was being used from July 2017 to December 2017 (i.e. for 2 quarters) for effecting exempt supplies, proportionate amount of ITC i.e. ₹ 66,000 shall not be allowed. Note: definition of quarter may have different impact in different situations (we will discuss this later in this article) Now we will see treatment of remaining ITC of ₹ 5,94,000 i.e. 6,60,000-66,000. For the month of January 2018, it was used for common purposes. For this purpose, proviso to rule 43(1)(c) read with rule 43(1)(d) specifies that ITC in respect of commonly used capital goods (i.e. common credit) denoted by “A” [ or ƩA= Tc] shall be calculated as under – Input tax on such capital goods 6,60,000 Less: 5% for every quarter from date of invoice 66,000
TC = ƩA 5,94,000 Logically, if we exclude the proportionate exempt or non-business part from this ₹ 5,94,000, balance credit should be granted to the taxpayer. When we move further, we see an error in drafting of rule 43. Let’s see this – As per rule 43(1)(e), proportionate monthly common credit (denoted by Tm; Tm = Tc / 60) on such goods shall be ₹ 9,900 i.e. 5,94,000/60 but it should logically be ₹ 11,000 i.e., 6,60,000/60. However, treatment given in rule is beneficial for the taxpayer. Let’s see this – Proportionate exempt part i.e. common credit attributable towards exempt supplies denoted by Te shall be calculated as under – Te = (E÷F) × Tr
Where Tr = Ʃ Tm E = Exempt turnover for the tax period i.e. for January 2018 in our example F = Total turnover for the tax period i.e. for January 2018 in our example
**Rule 43(1)(h) specifies that it shall be added to output tax liability along with applicable interest. however, it is important to note that no interest shall be levied on this amount because ITC on such goods has itself been taken in month of January 2018 itself. Important to note here is that rule 43 is silent on proportionate non-business part i.e. common credit attributable towards non-business use. However, section 17(1) intends that if capital goods are used for non-business purpose then ITC shall not be available in respect of capital goods to the extent these are used for said purpose. Since Act shall prevail, it is a suggestion that while calculating exempt turnover for the tax period i.e. January 2018 in our example, non-business turnover shall also be added. In this way, a reasonable amount attributable towards non-business purposes shall also be added to output tax liability. Non-business turnover can be determined by applying valuation rules.
+ as suggested, exempt turnover shall include non-business turnover also. $ No need, because ₹ 5,94,000 has already been credited in electronic credit ledger in month of January 2018 *logically this amount should have been calculated based on Tr being ₹ 11,000 in place of 9900 which is as per rules. # because ITC of ₹ 5,94,000 was taken in January 2018. Now we come on July 2018. From July 2018 and onwards, said goods was used for taxable purpose, hence no separate treatment is required because ITC in respect of said goods has already been taken in January 2018. (This is why rule 43 does not specify any treatment for this) Situation 2: when capital goods being used exclusively for effecting taxable supplies are subsequently used for common purpose Similarly, for such cases, proviso to rule 43(1)(d) has specified that in such case common credit (Tc) shall be calculated as under – Input tax on such capital goods - Less: 5% for every quarter lapsed from date of invoice - ---------------- TC = ƩA - However, there is no need to take any ITC because ITC would have been taken on fulfillment of conditions of section 16(2) of the Act. Remaining procedure is exactly the same as discussed in situation-1. Note: in later part of this article, few situations have been discussed in respect of which law is silent. Impact of definition of quarter Definition of “quarter” as given in section 2(92) of the Act is equally important because as per definition, quarter is not a period of three months from one date to another date but is a period of three months being April to June, July to September, October to December and January to March between one date to another date. If we find out number of quarters from 27.09.2017 to 04.07.2018, then number of quarters as per definition shall be 5 quarters as under –
Situations not specifically covered by law
Suppose a capital goods was received on 22.09.2017 along with invoice of even date. IGST charged on invoice was ₹ 1,20,000. Since the date of it’s receipt, it was being used for common purposes but from 01.10.2018, it is being used exclusively for effecting exempt supplies. Undoubtedly, ITC has to be reversed in month of October 2018 due to rule 43(1)(a). Here, it is important to mention that rule 43(1)(c) specifies that useful life of commonly used goods shall be taken to be 5 years. But in the absence of any specific provisions for treatment of ITC, here following questions arises –
Note: calculation on the basis of month may differ from the calculation on the basis of quarter. This becomes relevant to mention other related provisions like rule 32 where 5% per quarter has been used. similarly, again in rule 40, 5% per quarter has been used. But in rule 44, 1/60 per month has been used. This is matter of differences, so author reserves his views and leaves on learned members to decide on their own.
Here actually, there is no need for specific provision because ITC would have already been credited in electronic credit ledger.
Undoubtedly, as per section 17(2) r.w. rule 43(1)(a), ITC shall be reversed. Again, Rule 43 is silent on whether useful life of such capital goods is also to be taken 5 years. But it becomes relevant here to mention rule 44 where law states that life of capital goods shall be taken to be 5 years. So here also, one has to decide whether –
Author’s view is that one must choose between b & c.
Undoubtedly, as per rule 43(1)(b), ITC shall be available. Again, Rule 43 is silent on whether useful life of such capital goods is also to be taken 5 years. But it becomes relevant here to mention rule 44 where law states that life of capital goods shall be taken to be 5 years. So here also, one has to decide whether –
Author’s view is that one must choose between b & c. Other issues
Here one has to see that if any capital goods are being used for effecting exempt supply then only ITC shall not be available. So, one has to see if any particular capital goods were used for sale of land/said building, then only ITC shall be hit by rule 43 which author thinks is unlikely. Likewise, one has to see for other exempt supplies like sale of duty scrips etc. For other important points of Rule 43, one may download complete article written by author (approved by IDTC of ICAI) from - https://idtc-icai.s3-ap-southeast-1.amazonaws.com/download/knowledgeShare18-19/Determination&apportionment-input-tax-credit-respect-of-capital-goods.pdf?fbclid=IwAR0C45QqjGlpovg1_X1Q5-TQFV4ictZvTHvIjrE8X71ulN8rBqn0hgNHoVc
By: Shashank Gupta - December 14, 2018
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(i.e., 6,60,000 × 5% × 2) ----------------