ITC reversal is not required when unsecured loan remain loan

No ITC reversal is required when unsecured loans remain loans (not considered supplies).

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.

In Summary:

• No Input Tax Credit reversal is required when unsecured loans remain loans (not considered supplies).
• If the loans are converted into taxable supplies, Input Tax Credit reversal would be required under Goods and Services Tax law as per Section 17(2) of the THE CENTRAL GOODS AND SERVICES TAX ACT, 2017.

Conditions for Input Tax Credit (ITC) reversal

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.

Conditions for Input Tax Credit Reversal

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