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Under GST laws, Input Tax Credit reversal is mandated in cases where goods or services are used for non-business purposes or for making exempt supplies. Since unsecured loans are not considered as “supplies” under GST, the Input Tax Credit availed on inputs used for such loans is not eligible for reversal.
However, if the unsecured loans are later converted into taxable supplies, the Input Tax Credit related to the inputs used for making these supplies would need to be reversed in accordance with Section 17(2) of the THE CENTRAL GOODS AND SERVICES TAX ACT, 2017. This section governs the apportionment of credit and specifies instances where credit must be reversed.
When businesses pay taxes to the government, they can use the Input Tax Credit on Goods and Services Tax paid for their purchases, like raw materials or services used in the manufacturing or selling of products. But, if Input Tax Credit is wrongly claimed, it must be reversed by making the appropriate payment in the subsequent month.
Input Tax Credit reversals are required under several scenarios defined in the Goods and Services Act. Some of these are summarized as follows:
| Relevant GST Section/Rule | Circumstance | When ITC Reversal is Required |
|---|---|---|
| CGST Rule 37 | Recipient fails to pay the supplier for a supply | Within 180 days from the invoice date |
| CGST Rule 37A | Supplier fails to pay tax via GSTR-3B by 30th September | On or before 30th Nov of the following FY |
| CGST Rule 38 | 50% Input Tax Credit reversal by banking and financial companies | At the time of filing returns |
| CGST Rule 42 | Inputs used for exempt or non-business purposes | Monthly/yearly, using a specific formula |
| CGST Rule 43 | Capital goods used for exempt or non-business purposes | Monthly/yearly, using a specific formula |
| CGST Rule 44 | Cancellation of Goods and Services Tax registration or switching to composition scheme | During filing of Form REG-16 or ITC-03 |
| CGST Rule 44A | 5/6th Input Tax Credit reversal for gold dore bars stock as of 1st July 2017 | At the time of supply of gold dore bar/gold/gold jewellery |
| Section 16(3) | Depreciation claimed on Goods and Services Tax component of capital goods | At the time of closing accounts for that FY |
| CGST Section 17(5) | Input Tax Credit availed on blocked credits | During regular returns filing, up to annual return |
| CGST Section 17(5)(h) | Inputs used in goods lost, destroyed, or stolen | During regular returns for the month of the loss |
| CGST Section 17(5)(h) | Inputs used in goods given as free samples | During regular returns for the month of free sample issuance |
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