Input Tax Credit (ITC) Rules Under Section 17 of GST Act: Managing ITC for Mixed Supplies (Taxable and Exempt Supplies)

Section 17 and Rule 42 Guide Credit Apportionment for Mixed-Use Goods and Services.
 

Summary: 

The Input Tax Credit (ITC) rules under Section 17 of the GST Act provide clear guidelines on how businesses should manage ITC when goods or services are used for both business and non-business purposes or for making both taxable and exempt supplies.

Key Points of ITC Rules under Section 17:

1. Section 17(1) - Restriction for Business Use:
2. Section 17(2) - Restriction for Taxable and Exempt Supplies:
3. Apportionment of ITC - Rule 42:
4. Reversal of ITC for Exempt Supplies:

• ITC is only available for goods and services used for business purposes. Any portion used for personal or non-business purposes is not eligible for ITC.
• When goods or services are used for both taxable and exempt supplies, ITC can only be claimed for the portion attributable to taxable supplies, including zero-rated supplies.
• The ITC related to exempt supplies must be reversed and cannot be claimed.
• Rule 42 outlines the method for apportioning ITC between business and personal use, as well as between taxable and exempt supplies.
• ITC related to personal use or exempt supplies must be excluded, ensuring that only eligible credits are available in the electronic credit ledger.
• For common inputs and input services used for both taxable and exempt supplies, a portion of the ITC must be reversed. The remaining ITC is attributed to taxable supplies.
• Any ITC related to exempt supplies must be reversed in accordance with Section 17(2), ensuring that only ITC linked to taxable business activities is claimed.

The ITC mechanism under Section 17 of the GST Act ensures that businesses can only claim credits for inputs used for taxable business purposes. Credits related to personal use or exempt supplies must be reversed, ensuring compliance with the GST regulations. Rule 42 provides the framework for apportioning ITC when goods or services have mixed use, maintaining a clear distinction between taxable and non-taxable uses.

Input Tax Credit (ITC) rules, under Section 17 of the GST Act, address how credits should be managed when goods or services are used for both business and non-business purposes, as well as for taxable and exempt supplies. Section 17(1) restricts ITC to the portion used for business purposes, while Section 17(2) limits ITC for mixed use to only the part attributable to taxable supplies, including zero-rated supplies. Rule 42 outlines the method for apportioning ITC. ITC linked to personal use or exempt supplies must be excluded, and only eligible credits are allowed in the electronic credit ledger. For common inputs and input services, credits must be apportioned, with a portion reversed for exempt supplies and personal use. The remaining ITC is then attributed to taxable supplies, including zero-rated supplies. Any ITC related to exempt supplies must be reversed under Section 17(2), ensuring that only credits used for taxable business activities are claimed.

Section 17(1) - Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Section 17(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Rule 42 - Manner of Apportionment of Input Tax Credit

The input tax credit in respect of inputs or input services, which attract the provisions of sub-section (1) or sub-section (2) of section 17 being-

• partly used for the purposes of business and partly for other purposes or,
• partly used for effecting taxable supplies including zero rated supplies and
• partly for effecting exempt supplies

shall be attributed to the purposes of business or for effecting taxable supplies in the following manner-

Details of Input Tax Credit

-

* if No turnover in current tax period, E and F of the last tax period for which the details of such turnover are available

If common inputs and input services (C2) are used partly for business and partly for non-business purposes-