Understanding ITC Reversal Implications for Sale of Shares and Mutual Funds

Introduction:

In both the GST regime and its predecessor, Input Tax Credit (ITC) on exempted supplies of goods or services is subject to reversal and is not eligible for availment. Among these exempted supplies are sales of shares and mutual funds. This blog delves into the provisions governing ITC reversal concerning such supplies.

Restriction on ITC for Exempt Supplies:

According to sections 17(2) and 17(3) of the CGST Act, if goods or services, or both, are utilized partly for effecting taxable supplies and partly for exempt supplies, the input tax credit is restricted. It is allowed only for the input tax attributable to taxable supplies, with the ITC corresponding to the exempt supply being reversed.

Valuation for ITC Reversal:

Chapter V of the CGST Rules outlines the methodology for ITC reversal on various supplies. Specifically, the treatment for ITC reversal on the sale of securities is specified. Explanation 2(b) of Chapter V of the Central Goods and Service Tax Rules stipulates that the value for such reversal on the sale of securities shall be considered as 1% of the sale value of securities.

Classification of Mutual Funds as Exempt Supply:

Under section 2(47), exempt supply encompasses nil-rated supplies and non-taxable supplies. Therefore, if a supply falls under the category of non-taxable supply or nil-rated supply, it is treated as an exempt supply. Moreover, according to the definitions provided in sections 2(52) and 2(101) of the CGST Act, securities, which include mutual funds, are excluded from the purview of goods and services. Hence, mutual funds are considered a part of securities and are not subject to GST, thereby constituting an exempt supply.

Calculation of Reversal:

For instance: If the total turnover of the entity is Rs. 20 lakhs, and the value of sale of securities is Rs. 400,000, with a total input tax credit of Rs. 100,000, the calculation for ITC reversal would be as follows:

Value of exempt supply = Rs. 400,000 x 1% = Rs. 4,000

ITC Reversal: Total ITC x Value of exempt Supply = Rs. 100,000 x 4,000 = Rs. 200

Total Turnover of the entity = Rs. 2,000,000

Conclusion:

Thus, it is evident that ITC cannot be availed, and the calculation for its reversal follows the methodology discussed above. This analysis applies equally to shares as well, ensuring compliance with GST regulations regarding exempt supplies.