Understanding GST Rule 42: Common Input Tax Credit

Home - Blog - Understanding GST Rule 42: Common Input Tax Credit

What is Common Credit or Common ITC under GST?

The ITC amount that cannot be directly attributed to a specific supply, but is utilized for both taxable and non-taxable supplies, as well as for personal consumption, is referred to as a ‘common input tax credit’.

For example, a company is engaged in generation and distribution of electricity as well as construction of solar power plants. The supply of generation and distribution of electricity is exempt under GST. However, construction services of solar plants are taxable.

The company pays various expenses such as office rent, administrative costs, and internet bills on which GST is paid and the Input tax credit is available. This credit, however, does not relate specifically to exempted or taxable supply. Such ITC can be said as Common ITC or Common credit. 

Can Common ITC be availed in full?

No. Common ITC is to be attributed to taxable and exempted supplies. ITC attributed to taxable supplies can be availed. ITC attributed to exempted supplied is to be reversed.

How to calculate common ITC attributed to exempt supply? Or What is Rule 42 of CGST Rules, 2017?

Rule 42 of the CGST Rules, 2017 describes the method of determination of input tax credit in respect of inputs or input services being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies and reversal thereof.

As per this rule, the reversal of ITC with respect to exempt supplies should be calculated as follows:

Now, this common ITC is to be attributed to exempt supplies. Such an amount should be reversed in GSTR 3B. It is to be calculated as follows:

Common ITC attributed to exempt supply = Common credit (C2) *Exempt supply (E) / Total turnover (F)

This amount should be reversed in GSTR 3B.

Notes:

  1. Exempt supply and total turnover are to be taken for the respective tax period.
  2. Exempt supply is the aggregate value of exempt supplies during the tax period.
  3. Total turnover is the total turnover in the State of the registered person during the tax period.
  4. Where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of ‘E/F’ shall be calculated by taking values of ‘E’ and ‘F’ of the last tax period for which the details of such turnover are available, previous to the month during which the said value of ‘E/F’ is to be calculated.

Conclusion

In conclusion, understanding GST Rule 42 is crucial for businesses to properly attribute and manage common input tax credit. Adhering to the guidelines outlined in Rule 42 ensures compliance with GST regulations and helps in accurately availing and reversing input tax credits related to exempt supplies.

Table of Contents