1.
Input tax credit (ITC) on purchases
• Value of wooden materials purchased: Rs. 20,000
• GST rate on wooden materials: 12%
• ITC on purchases = 20,000 * 12% = Rs. 2,400
2. Output tax liability on sales
• Value of furniture sold: Rs. 30,000
• GST rate on furniture sold: 18%
• Output tax liability = 30,000 * 18% = Rs. 5,400
3. Net input tax credit available
The net input tax credit that the store can claim is the GST paid on purchases (input tax)
which can be adjusted against the GST collected on sales (output tax), according to
Tax2win. In this case, the ITC on purchases is Rs. 2,400. Since the output tax liability is
higher than the input tax credit, the store can claim the full ITC of Rs. 2,400.
4. Tax payable to the government
• Tax payable = Output Tax Liability – Net Input Tax Credit
• Tax payable = 5,400 – 2,400 = Rs. 3,000
Conclusion
The furniture store can claim a net input tax credit of Rs. 2,400. The store’s tax payable to
the government is Rs. 3,000. This calculation demonstrates how the ITC mechanism
reduces the overall tax burden on businesses by offsetting taxes paid on purchases against
taxes collected on sales.
1. Determine the GST liability under the Reverse Charge Mechanism (RCM):
• Value of service: Rs. 50,000
• Applicable GST rate: 18%
• GST payable under RCM by ABC Construction Pvt. Ltd. (registered recipient) = Rs.
50,000 x 18% = Rs. 9,000.
Since this is an intra-state supply (assuming based on the prompt not stating otherwise),
this amount would be split equally as CGST and SGST.
• CGST = Rs. 4,500
• SGST = Rs. 4,500
2. Determine the Input Tax Credit (ITC) for ABC Construction Pvt. Ltd.:
• ABC Construction Pvt. Ltd. (the recipient) can claim the GST paid under RCM as
Input Tax Credit (ITC) since the services are used for business purposes.
• The ITC can be claimed in the same month as the tax payment and is typically
claimed in the GSTR-3B return.
• Therefore, the Input Tax Credit available to ABC Construction Pvt. Ltd. Is Rs. 9,000.
Important Notes:
• ABC Construction Pvt. Ltd. Cannot use its existing Input Tax Credit (ITC) to pay the
GST liability under RCM; this payment must be made in cash via the electronic cash
ledger.
• XYZ Architects, as the unregistered supplier, is not required to be GST registered if
their turnover is below the threshold and they are not supplying goods or services
that are subject to RCM regardless of the supplier’s registration status (Notified
services like GTA, Sponsorship, etc.).
• ABC Construction Pvt. Ltd. Must issue a self-invoice for this transaction since XYZ
Architects is an unregistered supplier. This self-invoice should include all the details
as per the GST invoice rules.
• ABC Construction Pvt. Ltd. Must also issue a payment voucher at the time of making
payment to XYZ Architects.
• The relevant financial year for calculating the time limit for availing of input tax credit
under the provisions of section 16(4) of CGST Act is the financial year in which the
recipient has issued the invoice.
Under the Reverse Charge Mechanism (RCM) in India, the recipient of goods or
services is liable to pay the Goods and Services Tax (GST) instead of the supplier in
specific circumstances.
Here's how to calculate the GST liability and Input Tax Credit (ITC) for ABC
Construction Pvt. Ltd. In this scenario:
1. Determine GST Liability
Service Value: Rs. 50,000
GST Rate: 18%
GST Calculation (RCM):
Since XYZ Architects is an unregistered service provider and ABC Construction Pvt.
Ltd. Is a registered entity, the reverse charge mechanism is applicable.
The entire GST liability shifts to ABC Construction Pvt. Ltd.
GST Payable = Service Value * GST Rate = Rs. 50,000 * 18% = Rs. 9,000
GST Split (assuming intra-state transaction):
CGST = Rs. 9,000 / 2 = Rs. 4,500
SGST = Rs. 9,000 / 2 = Rs. 4,500
If it’s an inter-state transaction, then IGST = Rs. 9,000.
Therefore, ABC Construction Pvt. Ltd. Is liable to pay Rs. 9,000 as GST under the
reverse charge mechanism.
3. Input Tax Credit (ITC)
Eligibility: ABC Construction Pvt. Ltd. Can avail Input Tax Credit (ITC) on the GST
amount paid under the reverse charge mechanism, provided the service is used for
business purposes.
ITC Availability: Since ABC Construction Pvt. Ltd. Is paying Rs. 9,000 as GST (CGST
Rs. 4,500 + SGST Rs. 4,500, or IGST Rs. 9,000), they can claim this entire amount as
ITC in their subsequent GST returns, subject to the conditions and limitations
outlined in the GST Act.
Important Note: The GST paid under RCM must be paid in cash and cannot be offset
using existing ITC balances.
In essence, ABC Construction Pvt. Ltd. Will pay Rs. 9,000 as GST under the reverse
charge mechanism and can then claim this amount back as Input Tax Credit,
effectively neutralizing the tax burden in the long run.
