Input tax credit, blocked credits and supplier non-compliance
Sundaram Precision Ltd, a Gujarat manufacturer, supplies taxable auto components and also trades in exempt agricultural produce. For October 2024 its records show: common input tax credit on raw materials and input services of ₹13.80 lakh (CGST plus SGST); credit of ₹12 lakh on plant and machinery used exclusively in the taxable unit; ₹18 lakh on construction of a new administrative building on its own account; ₹3.50 lakh on a seven-seater Innova used by the managing director; ₹1.20 lakh on group health insurance for employees, which is not statutorily required; ₹2 lakh on an invoice from a supplier who has not filed GSTR-1 for two months; and ₹5 lakh on an invoice dated 15 March 2024, received and recorded on 10 October 2024. Taxable turnover for October is ₹80 lakh and exempt turnover is ₹20 lakh. The company has filed all its returns on time and wants to claim the entire ₹55.50 lakh as credit.
1. Compute the eligible input tax credit for October 2024, with reasons for each item.
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Computation of eligible ITC for October 2024
| Item | Amount (₹ lakh) | Eligible (₹ lakh) | Reasoning |
|---|---|---|---|
| Common inputs and input services | 13.80 | 10.488 | Rule 42 common-credit formula. |
| Plant and machinery, exclusively taxable | 12.00 | 12.000 | Directly used for taxable supplies; conditions in section 16(2) met. |
| Construction of administrative building | 18.00 | 0 | Blocked by section 17(5)(d); immovable property other than plant and machinery. |
| Innova car for managing director | 3.50 | 0 | Blocked by section 17(5)(a); passenger vehicle with seating capacity up to 13, not covered by the exceptions. |
| Group health insurance | 1.20 | 0 | Blocked by section 17(5)(b)(iii); not statutorily required. |
| Supplier who has not filed GSTR-1 | 2.00 | 0 for now | Section 16(2)(aa) condition not satisfied; credit can be taken only when the supplier furnishes the return and the details appear in GSTR-2B. |
| Invoice dated 15 March 2024, recorded 10 October 2024 | 5.00 | 5.000 | Section 16(4) time limit for FY 2023-24 is 30 November 2024; the credit is taken within time. |
| Total | 55.50 | 27.488 |
Rule 42 working
D1 = ₹13.80 lakh. D2 = 5% x ₹13.80 = ₹0.69 lakh. C2 = ₹13.80 - ₹0.69 = ₹13.11 lakh. Exempt turnover ratio E/F = ₹20 lakh / ₹100 lakh = 20%. Ineligible common credit = 20% x ₹13.11 = ₹2.622 lakh. Eligible common credit = ₹13.11 - ₹2.622 = ₹10.488 lakh.
2. Explain why the 5% deduction and the exempt-turnover ratio in Rule 42 are mandatory, and how capital goods are treated differently.
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Why the 5% deduction and the ratio are mandatory
Rule 42 treats common credit as initially availed but partly attributable to exempt supplies and non-business use. The formula is not a matter of choice: D1 is the common credit; D2 is a deemed 5% attribution to non-business use; C2 is the balance; E/F is the exempt-turnover proportion; the ineligible amount is C2 x E/F. The 5% is a statutory ad hoc factor, not an estimate the company can replace with its own records. The eligible amount is C2 less the exempt proportion.
For capital goods, Rule 43 applies instead, with a 60-month amortisation and the same E/F ratio. The company should maintain a consistent turnover denominator and include all exempt, non-GST and non-taxable supplies in E, while F is total turnover. If the actual exempt use changes, the annual computation and the final reversal at year-end correct the monthly position. The credit on the administrative building is not curable by the common-credit formula because section 17(5)(d) blocks it at source.
3. The supplier later files GSTR-1 in December 2024. Can the company take the ₹2 lakh credit then, and what time limit applies?
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Supplier compliance and time limit
The ₹2 lakh credit is not lost forever. Section 16(2)(aa) requires that the supplier has furnished the return and the details are communicated to the recipient. When the supplier files GSTR-1 in December 2024, the condition is satisfied for the return period in which the details appear in GSTR-2B, and the company can take the credit then, provided the other conditions in section 16(2) are met.
The outer time limit is section 16(4): the 30th day of November following the end of the financial year, or the annual return, whichever is earlier. For an invoice of FY 2024-25, that is 30 November 2025. The March 2024 invoice belongs to FY 2023-24, so its limit is 30 November 2024; taking it in October 2024 is within time.
If the supplier never files, the recipient cannot claim the credit merely on the invoice. The commercial remedy is to withhold payment or obtain a replacement invoice from a compliant supplier. The company should also check that the supplier's filing is reflected in GSTR-2B, not merely promised.