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Common Credit in GST: Understanding the ITC Rules

Q: Who cannot claim ITC?

ITC cannot be claimed by a non-resident taxable entity for either goods or services, or both. The one exception is that these organisations are able to claim the ITC for the items that they import. In certain situations, the entity's paid taxes will be accessible as a credit.

The seamless input tax credit is one of the most talked-about aspects of the Goods and Services Tax Law (GST). Any supply of products or services, or both, that are utilised or planned to be used in the course or furtherance of a registered person's business is eligible for an input tax credit. Businesses frequently utilise the same resources and inputs for both personal and professional purposes. Under GST, the common credit is the total input tax credit that can be used for all of these purchases. Additionally, inputs used to make exempted goods are not eligible for ITC. Common credit must be proportionate since a registered person may claim input tax credit on taxable supply and inputs for commercial activities. In this article, we will explain the concept of common credit and the rules applicable to it.

What is Common Credit in GST?

Only products and services used in the course of or furtherance of business are eligible for the ITC. Products and services purchased for personal use are not eligible for ITC. For instance, X is the owner of a supermarket. He rents a two-story structure, using the first floor as her home and the ground floor as his shop. Only the portion that relates to his business will be eligible for the input credit of GST paid on rent. X also raises veggies on her connected property, which he sells in his store. Three distinct purposes are served by the same property, often known as common property:

Taxable sales
Exempted sales (vegetables)
personal expenses (dwelling)

Some of the expenses are used for both business and non-business reasons, even though X is qualified to receive input credit for the GST she paid on her business expenses. The common credit is the GST in rent (GST is relevant since it is rented for business purposes).

Importance of Common Credit in GST

Only business use is permitted for ITC. Many traders combine their personal and corporate use of the same inputs. For GST paid on personal expenses, a taxpayer is not eligible to get any input credits. Once more, commodities that are free from GST already have 0% GST. Inputs utilised in these exempted goods cannot be claimed for ITC since doing so would result in negative taxation. Therefore, it will also be necessary to eliminate the input tax credit for exempted goods. You can use the following to determine the common credit that applies to personal and exempted supplies, leaving only the part that deals with taxable supplies. When you file your GST returns, you will have a certain amount that you can claim as ITC. In GSTR-2, the credit related to personal and exempted supplies needs to be reversed

Utilisation of Common Credit in GST

Two fundamental guidelines should be taken into account when using the common credit:

ITC is only permitted for business purposes: Only when the inbound goods or services are employed for business purposes can the Input Tax Credit be claimed. ITC cannot be applied or claimed if they are used for personal consumption.

ITC only permitted the sale of taxable products or services: Only when taxable supplies are sold using the inbound goods or services may an input tax credit be claimed. ITC cannot be claimed or used if they are used to sell exempt supplies.

The following table summarizes these rules regarding the utilization of common credit in GST:

Purchase of:	Used for	Claim ITC
Input Goods or Input Services	Business	Yes
Personal use	No
Both business and personal use	Claim eligible ITC
Input Goods or Input Services	Sale of taxable goods and services	Yes
Sale of exempt goods and services	No
Sale of both taxable and exempt goods and services	Claim eligible ITC

Calculation of Common Credit

Let us explain the calculation of common credit with the same example of X mentioned above. Here are the details for the month of May 2018:

Total Input Tax in the tax period: Rs. 1,00,000 (T)
Value of taxable items sold: Rs. 5,00,000
Value of vegetables sold (Agricultural activity): Rs. 2,00,000
Input Tax for inputs exclusively for personal use: Rs. 5,000 (T1)
Input Tax for inputs exclusively for agricultural activity (buying seeds, labour charges, soil): Rs. 20,000 (T2)
Input Tax for inputs and services on which credit is not eligible: Rs. 10,000 (T3)
Input Tax for inputs (transport charges) for taxable items: Rs. 10,000 (T4)

The total input tax for X will have 4 parts:

Purely personal supplies T1
Purely exempt supplies T2
Non-eligible ITC T3
Normal taxable sales T4

Step 1:

Determine the total amount of qualified ITC credit available

C1= Total ITC less [personal supply ITC, exempted supply ITC, and non-eligible ITC]. = 1,00,000-(5000+20,000+10,000) = 65,000 = T-(T1 + T2 + T3)

The available credit, or the total eligible credit, is determined in this phase. This is obtained by deducting ITC from all non-eligible, exempt, and personal inputs. The computerised ledger will be credited with this sum. In your GSTR-2, you must reverse the common ITC for non-eligible, exempt, and personal supplies.

Step 2:

Find the ITC for exempt and personal supplies

Common Credit C2 = Input Tax for taxable supply (T4) minus Input Tax credited to Electronic Credit Ledger (C1) = 65,000 – 10,000 = 55,000

This illustrates the common credit that must be distributed among exempt, taxable, and personal supplies. It might be the building's rent in our scenario. The residency portion's GST component will be inverted. There will be three sections to this common credit:

Partly Exempted: The portion of ITC related to exempted supplies is calculated as follows:

D1 = (Exempted turnover divided by Total turnover) x Common Credit= (2,00,000/5,00,000) x 55,000= Rs. 22,000

The proportionate approach is used by the formula to determine the quantity. The amount of Rs. 22,000 must be reversed in GSTR-2 since it is considered to be the ITC related to exempted supplies (vegetables).

Partly Personal: Many everyday costs, like rent, energy, and water bills, are utilised for both personal and professional reasons. The amount of credit related to personal purposes will be separated with the aid of this formula. 5% of Common Credit is D2. Accordingly, using our example, D2 = 5% of 55,000 = 2,750 Assuming that 5% of inputs are used for personal reasons, the formula determines the amount. In GSTR-2, the sum of Rs. 2,750 must be reversed since it is considered to be the ITC for personal supplies.

Normal Portion: Now figure out the part of the common credit that is related to the taxable supply (such as the shop's rent component).

ITC portion for personal supplies (D2) + ITC portion for exempted supplies (D1) = 55,000 – (22,000+2,750) = 30,250 C3 = Common Credit This is the typical credit that can be attributed to regular suppliers.

Step 3:

Lastly, calculate how much ITC you are eligible to receive.

ITC for regular supplies plus common credit for regular supplies equals the total eligible ITC for the month, which is 10,000 + 30,250 = 40,250.

Impact of Tax Credit on Your Annual Return

You must compute the total ITC for the year as stated in the annual return if you look at the GSTR-2 format. Depending on the circumstances, there may be a refund or interest if the annual return's ITC and the total ITC claimed during the year differ. Before the deadline for submitting the annual return, the same computations must be completed for the entire fiscal year. Let's assume that the total eligible credit deviates in the following ways from the computations above:

Case 1: The ITC on the 2017–18 yearly return is more than what was actually claimed. The total amount of eligible credit at year's end is $50,000. In this case, a credit of (50,000 – 40,250) = 9,750 may be claimed for any month prior to September 2018.

Case 2: The ITC on the 2017–18 yearly return is lower than what was actually claimed. The total allowable credit at year's end is $30,000. This means that 10,250 will be added to the output tax bill, and interest of 18% will be due from April 1, 2018, until the actual payment date.

Conclusion

In conclusion, ITC is only available for the tax paid on goods and services that are used for business and not for personal use. ITC can only be claimed on goods and services to the extent that they are truly being utilised for business reasons, and common credit must be computed when things are used for both personal and commercial objectives. As you have observed, it can be challenging to claim the correct ITC, necessitating careful documentation and adjustment to evolving GST regulations. The best way to keep pace with these regulations is by consulting an expert.

FAQ

Q1. What is a common tax credit?

Under GST restrictions, businesses frequently pool assets for both personal and company usage. The portion of the input tax credit that can be applied to business expenses that are also used for personal purposes is known as the common credit.

Q2. What is a proportionate tax credit?

When a party uses it for taxable supply or business purposes, the ITC is proportionate. The VAT principle states that an input tax credit can only be claimed when the output tax is due. Only a proportionate input tax credit may be claimed by the taxable person if some supplies are exempt and others are taxable.

Q3. Can I claim Common Credit (ITC) for personal purposes?

Only business-related items and services are eligible for ITC. ITC cannot be claimed if they are utilised for non-business (personal) purposes or to make exempt supplies.

Q4. Can ITC on exempt supply be claimed?

Inputs utilised in these exempted goods cannot be claimed for ITC since doing so would result in negative taxation. Therefore, it will also be necessary to eliminate the input tax credit for exempted goods.

Q5. What is the apportionment of input tax credit?

The credit amount will be limited to the portion of the input tax that can be linked to the registered taxable person's business purposes when the items and/or services are used for both business and non-business reasons.

Q6. Can we take GST input on traveling expenses?

If you have a GST-compliant invoice and the travel expenses are for business, you can claim GST on the trip.

Q7. Who cannot claim ITC?

ITC cannot be claimed by a non-resident taxable entity for either goods or services, or both. The one exception is that these organisations are able to claim the ITC for the items that they import. In certain situations, the entity's paid taxes will be accessible as a credit.