GST Reversal is a crucial concept for CA Foundation students. It refers to the process of returning previously claimed Input Tax Credit when goods or services become ineligible for credit. Under normal GST flow, businesses purchase goods or services and claim Input Tax Credit. However, when triggering events occur such as personal use or non-business purposes, the previously claimed credit must be reversed back to the government. Understanding key terms like Input Tax Credit, reversal provisions, and triggering events is essential for proper GST compliance.
The legal framework for GST reversal is established under CGST Act 2017 and CGST Rules 2017. Section 17 subsection 5 of CGST Act specifically lists items for which Input Tax Credit is blocked, including motor vehicles for personal transportation, food and beverages, club memberships, and goods for personal consumption. Rules 42 and 43 of CGST Rules provide the procedural framework for reversal, including proportionate reversal calculations for common use items, time limits for reversal within the same financial year, interest provisions for delayed reversal, and documentation requirements. This hierarchical structure ensures systematic compliance with reversal provisions.
Now let's set up a practical example with ABC Manufacturing Company to understand GST reversal calculations. The company has a monthly turnover of 50 lakh rupees and deals with mixed-use assets. In January 2024, they made several purchases: raw materials worth 10 lakh plus GST of 1.8 lakh, office equipment worth 2 lakh plus GST of 36 thousand, a motor vehicle worth 8 lakh plus GST of 1.44 lakh, furniture worth 1 lakh with 60% business and 40% personal use, and mobile phones worth 50 thousand. The company needs to reverse GST on the motor vehicle used for personal transport, furniture with mixed usage, and mobile phones for personal use. This business structure shows 80% business use and 20% personal use allocation.
Now let's calculate the GST reversal amount step by step using the reversal formula. The reversal amount equals ITC claimed multiplied by personal use percentage divided by 100. For Step 1, the motor vehicle has 100% personal use, so reversal equals 1,44,000 multiplied by 100 divided by 100, which equals 1,44,000 rupees. For Step 2, furniture has 40% personal use, so reversal equals 18,000 multiplied by 40 divided by 100, which equals 7,200 rupees. For Step 3, mobile phones have 100% personal use, so reversal equals 9,000 multiplied by 100 divided by 100, which equals 9,000 rupees. The total reversal amount is 1,44,000 plus 7,200 plus 9,000, which equals 1,60,200 rupees. This systematic calculation ensures accurate compliance with GST reversal requirements.
The accounting treatment for GST reversal requires proper journal entries to maintain accurate books of accounts. The journal entry format includes the date as 31st January 2024 and particulars as GST Reversal Entry. For debit entries, we debit Expenses Account for motor vehicle with 1,44,000 rupees, furniture with 7,200 rupees, and mobile phones with 9,000 rupees, totaling 1,60,200 rupees. For credit entries, we credit GST Input Tax Credit Account with 1,60,200 rupees, being reversal of ITC as per Section 17 subsection 5. The ledger account effects include increase in expense accounts, decrease in GST ITC account, increase in GST liability, and compliance with GST law. The T-account representation shows expenses account debited with 1,60,200 and GST ITC account credited with 1,60,200, maintaining the accounting equation balance.