Legal provisions



Legal Provisions:

ITC restriction on exempt supply:

  • As per section 17(2) & 17(3) of CGST Act, goods or services or both are used partly for the purpose of effecting taxable supplies and partly for effecting exempt supplies, the amount of input tax credit shall be restricted and allowed only for the input tax that is attributable to the taxable supplies and not exempt supplies. The ITC commensurate to the exempt supply shall be reversed.

What is the value on which ITC has to be reversed?

  • Chapter V of the CGST Rules states the methodology for ITC reversal on various supplies. The ITC reversal on sale of securities shall be the such treatment.
  • Now at the far end of the rules, we have an explanation which states the valuation for such reversal on sale of securities. Explanation 2(b) of Chapter V of the Central Goods and Service Tax Rules specifies that the value shall be taken as 1% of the sale value of securities.

Whether Mutual Fund is an exempt supply:

  • According to section 2(47) exempt supply includes nil rated supplies and non-taxable supplies. Hence, if a supply falls under the category of non-taxable supply or nil rated supply it shall also be treated as exempt supply only.
  • 2(52) read with S 2(102) of the CGST Act vide their definitions, debar the securities from the ambit of goods and services.
  • 2(101) of the Central Goods and Service Tax Act, defines securities as in S. 2(h) of the Securities Contract Regulation Act – 1956 which involve Mutual Funds as well.
  • Hence from the above analysis, we can understand that mutual funds are a part of securities which are not taxable under the GST and thereby considered as exempt supply.

How should the reversal be done?

  • For instance:

Total Turnover of the Entity is Rs.20 Lakhs, and value of sale of securities is Rs.400000 and the total input tax credit id Rs.100000.

Value of exempt supply = Rs.400000 x 1% = Rs.4000

ITC Reversal:

Total ITC x Value of exempt Supply      = Rs.100000 x 4000   = Rs.200

Total Turnover of the entity                        2000000


Hence, the ITC shall not be availed and calculation for the same shall be as discussed above. The same analysis will apply for shares as well.

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