GST issues around reversal of credit - Blog by Avalara

Published By Avalara India, 15 Sep 2017

GST issues around reversal of credit - Blog by Avalara

“Do I have to reverse the credit proportionate to the interest I earn on my fixed deposits?” A friend who is a finance manager asked me that question. Sounds strange on the face of it, and the logic often baffles many. So let’s take a closer look.

Many companies put fixed deposits with banks as a part of their treasury operations. Giving fixed deposits on interest is treated as exempt under the Goods and Services Tax (GST) law, and therefore is seen as an exempt service provided by the company to the bank. GST law requires that whenever one makes a taxable supply and an exempt supply (or, in this case, service), input tax credit (ITC) pertaining to the exempt supply, or service, needs to be reversed. Thus the question from my friend.

To reverse this ITC, my friend may have to travel through a maze of complex formulae in the rules.

Why such reversal is required

A basic concept in any value added tax (VAT) is allowing credit of tax paid on the inward supplies (or purchases), which then can be used to discharge tax on the outward supplies (or sales). As a corollary, when outward supplies are exempt, credit is not available. In some cases, like exports, tax may not be levied on the outward supply, but credit is still allowed. These are called zero-rated supplies in VAT terminology. It must also be noted that if a company performs an activity that is not a business activity (e.g., using a company car for private purposes), credit with respect to such activity is not available.

Though this looks very logical and easy, implementation of this principle is not. Any business will have myriad transactions, some of which are exempt, and some of which are.......

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