GST allows setting off of tax paid on inward supplies (purchases) against the liability of outward supplies (sales). One of the major steps to curb false/fraudulent claims of the input tax credit was initiated under Goods and Services Tax regime by introducing a procedure to reverse the amount of input tax credit availed within 180 days in case no or part payment is made to the supplier of goods or services with interest as notified under section 50(1). The idea behind introducing this process was to eliminate the exchange of accommodative invoices without actual supply of goods or services or both to avail input tax credit resulting in loss of revenue to the State and using such invoices as a means of financing.

This practice was existing under earlier laws too, but since the books of accounts and information was confined within the four walls of an organisation, manipulation was possible. However, after the enactment of Goods and Service Tax Act, the details about purchases, sales, debit notes and credit notes are now available in the public domain. In other words, we can say an organisation’s purchase book, sale book and related debit notes and credit notes are available on the server of Goods and Services Tax Department. This system has brought in a regime of transparency between the Tax authorities and the business houses and has also reduced the incidences of false input credit claims.

Section 16(2) of the Central Goods & Service Tax (CGST) Act 2017 provides for the reversal and re-availing of input tax credit in the case of:
No payment is made to supplier against the value of supply of goods or services within 180 days from the date of issue of invoice by the supplier on account of which ITC was availed the receiver of such goods or services is required to reverse the ITC availed by crediting the same to its liability.

In case part payment is made to supplier against the value of supply of goods or services within 180 days from the date of issue of invoice by the supplier on account of which ITC was availed, the receiver of such goods or services is required to reverse the proportionate ITC availed by crediting the same to its liability. In case only payment of tax under GST is made to supplier against the value of supply of goods or services within 180 days from the date of issue of invoice by the supplier on account of which ITC was availed, the receiver of such goods or services is required to reverse ITC availed by crediting the same to its liability.

The reversal of Input Tax Credit must be made along with interest as notified under section 50(1) [i.e. 18% p.a.] of the GST Act. The interest to be calculated is from the date of the invoice issued by the supplier of such goods or services.

However, the above rule does not apply to the transactions of supply of goods and services on which tax is payable on the reverse charge basis.
Also provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall have been paid for the purposes of the second proviso to sub-section (2) of section 16.

The input tax credit reversed due to non -payment, part-payment or by making payment of taxes only can be reclaimed at the time of making actual payment/ book adjustments to such suppliers against their dues without any time limit. Adjustment book entries to settle the amounts will be treated as actual payment as section 16(2) does not prescribe any specific mode of payment.

Conditions for reversal
We have seen that ITC is required to be reversed when payment is not made to the supplier within specified time. Similarly there are various scenarios mentioned in the Act when such reversal is required. Some of them are:

Rate of Interest
1. Interest u/s 50(3) are to be charged @24% p.a. (only in case of reclaim of credit reversed earlier).
Only cases covered u/s 42(10) and 43(10) are covered in section 50(3).
2. In other cases interest will be paid @18% p.a. u/s 50 (1).

Things to Consider
Interest @18% to be calculated at the time of reversal of input credit as per section 16(2) ITC availed earlier to the extent of the amount not paid shall be reversed and added to tax liability under the current liabilities of the Balance Sheet.
The interest has to be calculated as per the rates prescribed under section 50(1) as per the prescribed manner under Rule 37.
As per Rule 37, the details shall be furnished in GSTR-2 by creating liability in the electronic ledger. Since GSTR-2 has been suspended, machinery provisions to upload the desired details can not be compiled as required under GST Act.

ITC Calculation
The total ITC can be divided into:
Specific credit
Common credit

Specific credit: ITC that can specifically be attributable to a supply – either taxable, non-taxable, or supply consumed for personal use.
Treatment: Separate such ITC amount from the total ITC since it can be easily identified.
The amount of ITC that is only directly attributable to a particular taxable supply can be utilised. It is available in electronic credit ledger.
Taxpayer must reverse the amount of ITC directly attributable to a particular supply that is non-taxable/used for personal consumption, only when wrongly availed.

Common credit: ITC amount that cannot be attributable to a specific supply but is used for partly making both the taxable and non-taxable supplies/supplies used for personal consumption.

Treatment: Taxpayer must identify and reverse the proportionate ITC amount to the extent of supplies that are non-taxable/used for personal consumption. The remaining ITC left is eligible for claim.
The calculation differs for-
a) Inputs or input services- covered by rule 42
b) Capital goods- covered by rule 43

Rule 42: Reversal of ITC on inputs/input services
Step1: Businesses must first segregate the specific credits that are ineligible for claim, from the total ITC as follows:
T= Total input tax paid credit on inputs and input services
T1= Out of ‘T’, the specific credit attributable to inputs/input services intended to be used for non-business purposes
T2= Out of ‘T’, the amount of input tax attributable to inputs/input services intended to be used exclusively for effecting exempt supplies
T3= Out of ‘T’, the amount of input tax deemed as ‘blocked credits’ under section 17(5)
Note: T1, T2, and T3 must be reported in GSTR 3B at summary level for every tax head
Step2: Reduce T1, T2 and T3 from the total ITC and derive the common credit as follows-
C1= ITC credited to electronic credit ledger= T – (T1 + T2 + T3)
T4= Specific credit on inputs/input services attributable exclusively for making taxable supplies. This would also include zero-rated supplies like exports and supplies to SEZ.
C2= Common credit= C1 – T4. ITC on the inputs that is assumed to have been used partly in making taxable supplies and partly in making exempt supplies or used for a non-business purpose.
Step3: Compute the amount of ITC to be reversed out of the common credit as follows-
D1= The ITC attributable towards exempt supplies out of common credit: (E÷F) × C2
Where,
E: Aggregate value of exempt supplies during the tax period
F: Total turnover in the State of the registered person during the tax period
Note: For building construction services, (E÷F) will be calculated on a project-basis where:
-E stands for aggregate carpet area of exempt construction project or apartments sold after construction is over
-F stands for aggregate carpet area of the apartments in the project
D2= Deemed to be ITC attributable for non-business purposes out of common credit= 5% of C2
C3= Remaining eligible ITC out of common credit= C2 – (D1 + D2)
Based on the above calculations, D1 and D2 will be the ITC that needs to be reversed.

Rule 43: Reversal of ITC on capital goods
The first step is to find out if the ITC falls under the following criteria:
A. The ITC is in relation to capital goods that have been used exclusively for non-business purposes or for making exempt outward supplies. OR
B. The ITC is in relation to capital goods that have been used exclusively for making supplies other than exempt supplies. Note that this would include zero rated supplies too.
In case the ITC falls under category ‘A’ above, then credit will not be allowed in respect of the same.
In case the ITC falls under category ‘B’ above, then credit will be allowed and taken to Electronic Credit Ledger.
The useful life of capital goods are taken to be five years from the date of invoice. This is done so that in case the capital goods were covered in category ‘A’ or ‘B’ as mentioned earlier and are now not covered under either category, then the ITC would be called ‘common credit’ or ‘Tc’ and 5% would have to be deducted from this common credit for every quarter or part quarter for the time it was covered in the category ‘A’ or ‘B’.
The useful life of the capital goods have been taken as 5 years, but our filing period relates to the supplies made/received in a particular month, so we will first find the ITC attributable to a month by dividing the credit by 60.

Tm= Tc ÷ 60
Amount of ITC attributable to a tax period (a month) on common capital goods during their useful life
Tr= Aggregate Tm of all those capital goods which have useful life remaining at the beginning of the tax period
Te= This is the common credit attributable towards exempted supplies, which is calculated as follows-
(E ÷ F) × Tr
Where,
E: Aggregate value of exempt supplies made during the tax period
F: Total turnover in the State of the registered person during the tax period
Note: For building construction services, (E÷F) will be calculated on a project-basis where:
-E stands for aggregate carpet area of exempt construction project or apartments sold after construction is over
-F stands for aggregate carpet area of the apartments in the project
Thus, Te calculated above will be the ITC in respect of capital goods that is required to be reserved or added to the output tax liability. Note that the above calculations would slightly differ if the supply is in the nature of services covered under Paragraph 5(b) of Schedule II of the CGST Act.

Rule 44: Reversal of ITC in case of cancellation of GST registration or switches to composition scheme
The aim of this rule is to reverse all the ITC that has been availed by a registered person in the event that he chooses to pay tax under the composition scheme or his registration gets cancelled for any reason.
The calculation is done as follows:
For inputs held in stock or contained in semi-finished goods and finished goods in stock, the ITC must be reversed is calculated proportionate to corresponding invoices on which credit was taken. Thus ITC will be allowed only upto the time the registered person switches to composition scheme or on cancellation of registration.
In case of capital goods, ITC availed will be based on the useful life (in months) and shall be computed on a pro-rata basis. Thus ITC for the remaining useful life of the asset must be reversed while switching over to composition scheme or on cancellation of registration.