Whenever a taxable person supplies both taxable (including zero rated) and exempted supplies. He has to reverse the common ITC (Input taken on services that are used for both taxable and exempted supplies) in the ratio of exempted supplies/total supplies. This is called common ITC reversal.
As per Rule 42, ITC reversal is required for that portion of common credit which is attributable to exempt supplies or for non-business use.
To calculate the common ITC reversal value we may use this formula:
Common ITC reversal value = Total ITC for common services * (exempted supplies/total supplies)
📝 Note: According to Section 2(47) exempted supply includes “nil rated supplies”.
Examples of Exempt Supplies
- Sale of MEIS Script
- Forward contract with banks (only 1% on value to be treated as exempt supply)
- Supply of other exempt goods (including nil rated)
Examples of Common ITC
- Banking Services
- Auditor fee
- Common accounting software
- Internet charges etc.