ITC Reversal Requirements Under Rule 42 for exempt by products, Goods and Services Tax - GST

[Sudhir M]

Is ITC reversal under Rule 42 required if the Company has ITC related to the manufacturing process, where the ultimate result of such manufacturing is taxable products, but there are by-products that are exempt under GST? Specifically, is the Company required to reverse common ITC in relation to the turnover of exempt sales of these by-products?

Posts / Replies

[Sadanand Bulbule]

Yes. In terms of Section 17[2] of the CGST Act, you need to restrict/reverse ITC to the extent of exempt supplies, irrespective by-products.

Since, no output tax is payable on the supply of by-product, being exempt goods, the input tax credit in such cases is partially admissible to the extent of taxable supplies.

[SUSHIL BANSAL]

CBIC Circular No. 41/15/2018-GST dated 26th March 2018 clarifies that when inputs/input services are used for both taxable and exempt supplies, reversal is necessary.

[YAGAY andSUN]

Yes, ITC (Input Tax Credit) reversal under Rule 42 of the CGST Rules is required in your case. As per Section 17(2) of the CGST Act, when inputs or input services are used for making both taxable and exempt supplies, the credit must be restricted to the portion attributable to taxable supplies. Since the by-products generated in your manufacturing process are exempt under GST and no output tax is paid on them, they are treated as exempt supplies, even if they are unintended outcomes.

The CBIC Circular No. 41/15/2018-GST dated 26th March 2018 confirms this position. It clarifies that in cases where common inputs or input services are used to produce both taxable goods (main product) and exempt goods (like by-products), the taxpayer must calculate and reverse the proportionate ITC related to exempt supplies. Therefore, your company must reverse ITC proportionately under Rule 42 for the exempt turnover from by-products.