Applicability of Reversal of ITC under Section 18(4) wherein tax rate for service has been provided with the condition that “credit of input tax charged on goods and services used in supplying the service has not been taken”

In the recent rate notifications, there have been entries for which rates have been prescribed with a condition that “credit of input tax charged on goods and services used in supplying the services has not been taken”.

The question is that whether there would be applicability of reversal under Section 18(4) for such services by treating the same as services becoming wholly exempt from levy of tax.

Reversal under Section 17(2) of CGST Act read with Rule 42 and 43 for common credit is applicable to such entries by way of Explanation iv to N. No. 11/2017- Central Tax (Rate), Dated 28-06-2017 which reads as follows-

Wherever a rate has been prescribed in this notification subject to the condition that credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that,—

(a) credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and

(b) credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder.

On a reading of Section 18(4) with N. No. 11/2017- Central Tax (Rate), Dated 28-06-2017 and Explanation (iv) to the said notification, it appears following

a) Entry no. (b) to explanation iv only applies the deeming fiction for treating such services as exempt supply for the purpose of provisions of sub-section (2) of section 17 of the CGST Act, 2017 and the rules made thereunder.

b) Entry no. (b) to explanation iv does not extends it to provision of Section 18(4) of CGST Act, 2017.

c) Also, although the observation above is sufficient to conclude the question but also if we read through section 18(4), it provides that the supply of goods or services should have become wholly exempt from levy of tax but in such cases, the goods or services have not become wholly exempt from tax but are still leviable to tax and that’s why there was a need for deeming fiction for Section 17(2) but the government in its own wisdom did not extend the same to Section 18(4).

Therefore, provisions of Section 18(4) are not applicable to services wherein tax rate has been provided with the condition that “credit of input tax charged on goods and services used in supplying the service has not been taken”.