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CA Intermediate · Taxation · Input Tax Credit

Mehta Traders, a registered person, makes both taxable supplies and exempt supplies. In a month, its common input tax credit (ITC) on inputs and input services used for both kinds of supplies is Rs 5,00,000. Its turnover details for the month: taxable supplies Rs 30,00,000, exempt supplies Rs 10,00,000 (total turnover Rs 40,00,000). Ignoring any other credit and blocked items, how much of this common credit is ineligible and must be reversed under the rules (exempt supply proportion)?

Rs 1,25,000 must be reversed. Common credit is apportioned between taxable and exempt supplies in the ratio of turnover; exempt supplies form one quarter of total turnover of Rs 40 lakh, so one quarter of Rs 5,00,000 is ineligible. The remaining Rs 3,75,000 is eligible.

  1. ARs 1,25,000Correct
  2. BRs 3,75,000
  3. CRs 1,66,667
  4. DRs 2,50,000

Explanation

Credit attributable to exempt supplies = common credit x exempt turnover / total turnover = 5,00,000 x 10,00,000 / 40,00,000 = Rs 1,25,000. Rs 3,75,000 is the eligible credit (taxable proportion) and is the key wrong choice. Dividing exempt by taxable turnover would give Rs 1,66,667, which uses the wrong base.

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