According to Section 16(1) of the CGST Act, 2017, when goods and/or services are used for both non-business and business purposes, the registered person can only claim the ITC attributable to business purposes. Thus, such transactions involving both business and non-business purposes will necessitate the registered person to divide the credit into eligible and non-eligible categories.
The methods of allocating the credit are governed by section 17 read with Rules 42 and 43 of the CGST Rules. The rules are intended to allow registered persons to claim ITC only for transactions carried out in the course or furtherance of business.
Rule 42: Credit allocation in all cases of inputs and input services other than construction services
Step 1: Determine Common Credit
The first step in the apportionment process should be determining which credit amount has the ‘mixed credit.’ For example, if a registered person has 5 computers and two of them are used by his son for gaming, the ITC on the other two computers is not available. However, in order to bifurcate the credit, we must first calculate the total mixed credit/common credit.
|Total Input tax credit for the specified tax period||xxxx|
|Credit relating to Non-business Purposes||xxx|
|Credit relating to exempt supplies (including non-taxable supplies)||xxx|
|Blocked Credit under section 17(5)||xxx|
|ITC available in the E. Credit Ledger||xxxx|
|Credit available Purely for exclusive taxable supplies (including zero rated supplies)||xxx|
Step 2: Determine eligible and ineligible credit.
Now that we know the exact amount from which we must separate eligible and ineligible credit, we can simply cross-multiply the factors and distribute the credit proportionally.
- Eliminating Exempt Supplies Credit from the Common Credit
Aggregate value of exempt supply/Total Turnover in the state x Common Credit
Exempt Supply under section 2(47)
- All supplies that are exempt
- Non-taxable supplies
- RCM’s outward supplies
- Securities transactions
- Sale of Land and Structure (subject to such conditions)
- All of the activities listed in Schedule III (except sale of land & building)
- Excise, VAT, CST, and other taxes
- Accepting or leading money in exchange for interest (except for banking, financial institution or NBFC)
- Transportation of exported goods from a customs station to a location outside of India
- Non-business Purposes
Because it is difficult to pinpoint every transaction and accurately measure the non-business portion of a transaction, the rule has a pre-defined percentage as a standard practice for calculating credit for non-business purposes.
Non-business credit out of the common credit: 5% of the common credit
Step 3: Determine the Eligible credit
We have now arrived at the point where we have the total amount of common credit under step 1 and the amounts that should be deducted from the total amount of common credit under step 2 in order to reach the eligible part.
Eligible credit= Common Credit- Exempt supply credit (Step 2 (point A))- Non-business purpose credit (Step 2 (Point B))
Step 4: Limit the amount of ineligible credit.
You can add Points A and B from Step 2 to calculate the total amount of ineligible credit, which you can then add back to the output tax liability.
This calculation is required to determine the precise amount of ITC that can be claimed on the inputs and input services. Any errors in this section can lead to incorrectly claiming ITC and the associated consequences. A wise way to reduce the likelihood of such errors and for a better and more accurate reconciliation that includes the allocation of eligible and ineligible credit is to use an automated platform like Finsights. A platform that completely automates your GST ITC reconciliation process and eliminates the need for unnecessary calculation and data organisation for the best user experience.