GST Input Credit Tutorial 08 – Proportionate Credit

GST Input Credit Tutorial 08 – Proportionate Credit Maintaining separate set of records for different categories of supply. ITC benefit & proportionate credit. in the previous sections we’ve seen the

negative list of supplies on which input

tax credit is not available the reality

the wrong reality is that every business

will have both info tax eligible

supplies as well as ineligible supplies

what do you do in such situations

that’s where proportionate credit comes

into play proportionate credit deals

with segregating eligible and ineligible

supplies before we go into the details

of proportionate credit I want you to

keep in mind this one very important

point that any business will have to

maintain separate records for four

categories of supplies exempt non-exempt

business use or personal use supplies

that are used for outputs that are

exempt or non-exempt supplies that are

used for business or for personal use

why is this we’ve already discussed the

three types of supplies based on the

carrot and stick approach that the

government follows for incentivizing

value addition there are exempt supplies

or there are IPC eligible supplies or

there is a negative list so there are

two cases where ITC benefits is not

applicable one where there is an exempt

outward supply any supply used for

adding valued exempt outward supply

IPC is not available and second that it

is not used for business if a business

purchase a certain supplies and does not

use it for business and an ITC is not

available in normal terms supplies used

for personal consumption what if you

purchase a supply you use it for

business but in turn you produce exempt

goods what happens in that scenario or

the other way around

confusing don’t worry it is very easy to

understand once we plot all the

situation in a x matrix so here you

have two cases two independent

situations

where the supply is used for business or

personal use that’s one situation one

question the second is whether the

outward supply is exempt or taxable so

we have a two by two matrix

exempt for taxable on the y-axis

business or personal on the x-axis let’s

take the first box it is a situation

where you use your invert supply for

business use

but you produce exempt outward supply in

such the situation no input tax credit

is available the next box is where you

produce exempt goods as well as you’re

using it for personal consumption then

definitely no ITC is available both are

not allowed in third situation where

you’re using it for personal consumption

but goods you produce are actually

taxable under the law still no ITC

allowed because you’re using it for

personal consumption the fourth

situation is where you’re using it for

business purposes and you’re using it

words taxable out word supply it is here

that ITC is available both the

situations are so the situation is even

if one of the criteria is not met then

ITC will not be available

check out the RO for exempt no ITC in

both the square boxes check out the

column for personal no ITC for both so

even if one situation prevails no ITC is

available it is only available when you

pick both the situations that it is used

for business and it is used to words

producing a tax of the supply well the

conditions of proportionate credit fall

exactly in line with the underlying

principles of negative lists no value

addition means no input tax credit

that’s the logic behind if supplies are

not used for business no idea is

available

the second reason for items in the

negative list was to avoid double tax

benefit and that’s the logic behind

exempt outward supplies condition if the

outward supply

already exam you don’t have an output

tax why would you take an input tax

credit double tax benefit avoided and so

there are three provisions under

proportionate credit yes three

the first is business use supplies used

for business and for non-business

purposes second is taxable output

whether the outward supply is taxable or

exempt and third is a special option

only for banks under the proportionate

credit remember the first point before

we started discussing proportionate

credit relating to maintaining separate

documents the business will have to

maintain separate records for all

categories of inward and outward supply

and track where all the inward supplies

are used this is very important to

follow the provisions under

proportionate credit in the first case

relating to business use what

proportionate credit states that any

business which purchases goods and

services if it uses for business it can

claim input tax credit on it while if it

is not used for business purposes

IDC will not be allowed now in order to

compute these portions of ITC allowed

and not allowed the business will

definitely have to mean in separate

records of the usage of its supplies

same is the case with the second

category of taxable output in word

supplies which go into taxable outward

supply ITC SLO while if they go into

exempt outward supply IPC is not allowed

and to identify these particular

categories the business will have to

mean in separate records and this is why

it is called proportionate credit you

will get proportionate credit the

proportion is based on the usage while

finding out how much of your supplies

are axial or example you’ll have to keep

things in mind axle supplies would

include zero rate which supplies these

are supplies for which the percentage of

tract

tried by law is zero percent zero rated

supplies include the export of goods or

services or the supply of goods and

services to an S easy developer or an AC

set unit now you should know that s easy

units are considered as export areas so

if goods are exported or if they are

supplied to s is a developer or S is

accurate then there would not be any tax

on them they’ll have a zero percent tax

even then it is said to be a taxable

supply and has to be included in taxable

supply calculation when you are

calculating exempt supplies you will

have to include those outward supplies

on which the reverse charge is

applicable that is your customer will

have to pay reverse charge tax on it you

will not have to pay any tax on that you

will not even have to collect any tax

from your customer so you’ll have to

include reverse charge applicable

supplies in exam supplies going on with

the third item under proportionate

credit which is a special option for

banks why is this there when banks have

lot of services which are taxable and

lot of services which are exempt by law

the services relating to accepting

deposits or lending money all the

charges or it service tax is exempt and

so it could get a little complicated for

banks to separate taxable and exempt

supplies following the Canon of

simplicity GST law provides an option to

get rid of this complication this option

is for banking company financial

institutions including nvf C’s which are

engaged in the business of accepting

deposits or extending loans or advances

what is the option

the banks have two choices they can

either stick to the original segregate

as usual segregate their inputs into AXA

bill or exempt output and claim input

tax credit only for those in which which

are used for taxable output or they

could go for a % proportion

every month we’ll have to avail % of

the eligible input tax credit on inputs

capital with an input services in that

month the first situation we’ve

discussed this in detail it would remain

the same as is for all the rest of the

taxpayers segregates supplies IDC

available on taxable out word supply not

available on exam out word supply the

second case % of all the input tax

credit you can claim as ITC the second

% the remaining portion you wave it

off in order to get rid of the

complications of identifying separately

what input goes into taxable supply and

what goes into exempt supply now there’s

a condition attached this option does

not come for free there is a condition

where it’s a very simple condition once

an bank chooses any of this one option

it can not be withdrawn for the

remaining part of the year the bank will

have to follow the chosen option for the

entire period and so that was what

proportionate credit was all about in

this section of the module we understood

the underlying principles of negative

list we also went through all the

negative lists the specific exemptions

in the list within the specific list

Motor Vehicles and works contract we

recognized the uses of proportionate

credit and we also examine the special

option available for banks and a

proportionate credit