Understanding Input Tax Credit in Mixed Supply Scenarios

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Proportionate ITC when partly used for business or taxable supplies Understanding Input Tax Credit (ITC) under the CGST Act when taxable & exempt supplies coexist is crucial for compliance. Here are key takeaways: • VAT Principle: ITC is available only when output tax is payable. For mixed taxable & exempt supplies, ITC is proportionate (Sec 17, CGST Act). • Business vs. Non-Business Use: ITC restricted to business use only (Sec 17(1)).

• Taxable vs. Exempt Supplies: ITC limited to taxable supplies, including zero-rated; exempt supplies excluded (Sec 17(2)). • Government Rules: Central/State Govt can prescribe ITC apportionment methods (Sec 17(6)).

• Definitions: Taxable supply (Sec 2(109)), non-taxable supply (Sec 2(78)), exempt supply (Sec 2(47))—e.g., alcohol is non-taxable, requires ITC reversal (Karnani FNB case, 2023).

• Zero-Rated Supplies: Exports & SEZ supplies qualify; full ITC allowed with refund options (Sec 16, IGST Act). • Exempt Supply Valuation: Includes land, building (stamp duty value), securities (1% sale value); excludes most Schedule III activities (Sec 17(3)).

• Real Estate Exception: ITC apportionment based on construction area, not value (Order 04/2019-CT). • Banks/FI/NBFC: Option for 50% ITC or proportionate ITC (Sec 17(4)).

• ITC Reversal: Common ITC apportioned monthly; final calc by Sept post-FY (Rule 42). Capital goods ITC reversed proportionately over 60 months (Rule 43). Stay compliant—know your ITC rights!