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Published on:

January 28, 2025

Alankar Mishra

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Basics of GST

Understanding Common Credit in GST and ITC Rules for Common Credit

The Goods and Services Tax (GST) has shaken up the Indian tax system like never before. And perhaps the most important feature of compliance under GST is the Input Tax Credit (ITC). Since business functions in diverse verticals, it’s important to have a good grasp of the common credit in GST to avoid compliance pitfalls and derive maximum tax benefits. In this article, the authors focus on the regulation, calculations and recommendations concerning the management of common credit under GST.

What is Common Credit in GST?

The term common credit is related to the Input Tax Credit (ITC). It is a type that is only used for both taxable supplies and exempt supplies. Normally, the expenses for inputs or services rendered are incurred for both taxable and exempt activities. Such is the situation where a manufacturer supplies a wide range of goods whereby some are GST exempt. In that case, the manufacturer will incur overheads such as electricity. In case such deductibles are incurred, then a similar input tax credit will have to be assigned proportionately.

Importance of Common Credit in GST

Proper handling of common credit is critical for:

1. Avoiding Non-Compliance: Incorrect ITC calculations can lead to penalties.

2. Maximising Tax Benefits: Apportioning ITC ensures businesses claim only eligible credits.

3. Streamlined Audits: Accurate records simplify audits and reduce disputes with tax authorities.

Understanding Input Tax Credit (ITC) in GST

The GST system allows businesses to reduce their tax liability by claiming deductions on purchases of goods and services which means claiming an input tax credit. However, input tax credit needs to be apportioned correctly when making taxable and exempt supplies. The GST legislation contains provisions on how to apportion input tax credits.

Legal Provisions Governing Common Credit

The Eighth Schedule of the CGST Rule 2018 has established directives regarding common credit usage. According to these rules, how the ITC is to be calculated once an input, input service and capital goods are used in both taxable and exempt supplies is to be outlined.

Rule 42: It deals with the Supply of goods and Services.

Rule 43: Capital assets use.

Calculation of Common Credit

Step	Action
1. Segregate ITC	Divide ITC into three categories:
	Exclusive ITC for Taxable Supplies: Fully claimable.
	Exclusive ITC for Exempt Supplies: Not claimable.
	Common ITC: Needs apportionment.
2. Identify Turnover	Calculate the total turnover (taxable, exempt, and zero-rated supplies).
	Identify the proportion of exempt supplies in the total turnover.
3. Apply Formula	Use the formula for exempt supplies:
	Common Credit for Exempt Supplies = (Value of Exempt Supplies ÷ Total Turnover) × Common ITC
4. Reverse ITC	Reverse the ITC for exempt supplies in the GST return.

Special Provisions for Capital Goods

Capital items related to taxable as well as exempt supplies are prorated over 60 months. There is a need to do ITC calculation and reversal every month for the exempt percentage.

Practical Challenges in Managing Common Credit

1. Calculation Complexity: Businesses have a problem segregating and apportioning ITC correctly.

2. Variation in Turnover: A variation in turnovers can lead to complications in calculating ITC.

3. Excess Records Compliance: Under GST return filing is cumbersome as a lot of records have to be kept to ensure the accuracy of the returns filed.

Best Practices for Managing Common Credit

1. Maintain Clear Records: Take records of the business inputs procured, provided services and the business activities relating to both taxable and exempt.

‍2. Use Automated Software: Accounting software that is GST compliant provides relief from the ITC tallying encumbrance.

3. Conduct Regular Audits: ITC reversal and compliance with the GST law get verified at timely intervals through regular audits.

‍4. Consult Tax Experts: Professional assistance aids in grasping the complexities underlying GST frameworks.

Conclusion

Ensuring proper utilization of common credit under GST is an important aspect for every business which is also dealing with making exempt supplies. Following the stipulations of Rule 42 and Rule 43 of the GST Regulations assists businesses to remain compliant, earn the maximum input credit available and avoid the incurrence of fines. The use of technological solutions such as automated software as well as conducting periodic audits can enhance compliance efficiency. A correct interpretation of the rules ensures that the company can optimize processes and remain competitive in the market.

FAQs

1. What is common credit under GST?

Common credit is the Input Tax Credit for both goods and services where the supply is both taxable and exempt making it necessary for fractional division.

2. How is ITC calculated for exempt supplies?

Once again, this is calculated based on the ITC formula as follows: Value of exempt supplies x common ITC divided by Total Turnover.

3. What is Rule 42 in GST?

Regulation 42 covers the division of ITC concerning inputs and input services that are utilized in making both taxable and exempt supplies.

4. How is ITC on capital goods managed under GST?

The ITC for capital assets is spread over 5 years. Each month businesses will be required to deduct the part that has been exonerated.

5. Can businesses claim ITC for exempt supplies?

No, ITC cannot be claimed in respect of goods and services used entirely for making exempt supplies. Such an amount has to be reversed.

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