Taxation - GST Ch 07: Itc - Test 5: answer key

Question 1 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. Vikramaditya Tech Labs LLP (VTL), registered in Delhi, manufactures industrial sensors and supplies them to domestic and overseas customers. During September 2026, the LLP also earned exempt revenue from certain research publications. Its accounts department compiled the following input tax figures for September. Total GST on inputs and input services was ₹10,00,000. Of this amount, ₹50,000 related exclusively to non-business activities, ₹1,00,000 related exclusively to exempt publications, ₹50,000 related to inward supplies blocked under section 17(5), and ₹2,00,000 related exclusively to taxable and zero-rated supplies. The remaining credit represented common inputs and input services used for business operations, including supplies made to taxable and exempt customers. Some common expenditure was also partly attributable to non-business activities. During September, the LLP recorded exempt turnover of ₹20,00,000 and total turnover of ₹1,00,00,000. All amounts were determined using the same tax-period figures. The finance team proposes to apply Rule 42 separately to each category before calculating the common credit reversal. VTL also purchased a production-control machine on 1 September 2026. The machine carries GST of ₹6,00,000 and is used commonly for manufacturing goods supplied to taxable customers and for producing goods connected with exempt publications. It is used entirely for business purposes. The machine's invoice is valid, and all other conditions for ITC have been fulfilled. For the September tax period, the exempt turnover ratio applicable to this machine is the same as that of the LLP. No other capital goods are included in the calculation.

Calculate the combined monthly reversal under Rule 42 for common inputs and input services used partly for exempt supplies and partly for non-business purposes. Apply the prescribed formula using the turnover ratio of 20%, after first determining the common credit C2. The LLP's common expenditure includes both taxable and exempt business activities.

1. ₹1,20,000, comprising exempt-supply reversal alone.
2. ₹1,30,000, comprising exempt and non-business reversals.
3. ₹1,50,000, comprising both prescribed reversals on common credit. (correct answer)
4. ₹1,80,000, comprising the exclusive and common credit reversals.

Answer: C — ₹1,50,000, comprising both prescribed reversals on common credit.

Explanation. T = ₹10,00,000. C1 = ₹10,00,000 − (₹50,000 + ₹1,00,000 + ₹50,000) = ₹8,00,000. C2 = ₹8,00,000 − ₹2,00,000 (T4) = ₹6,00,000. D1 = 20% × ₹6,00,000 = ₹1,20,000. D2 = 5% × ₹6,00,000 = ₹30,000. Combined reversal = ₹1,20,000 + ₹30,000 = ₹1,50,000. The supplied ICAI chapter places detailed Rule 42 calculations at Final Level; this question applies the statutory formula within the requested test scope.

Where it goes wrong. Applying the 5% non-business factor to total ITC instead of common credit C2, or omitting the exempt-turnover reversal.

Authority. Section 17(1) and (2) of the CGST Act, 2017; Rule 42(1)(a) to (m) of the CGST Rules, 2017

Question 2 · 2 marks · Taxation - GST Ch 07: Itc · hard

After considering the exclusive attributions and common credit reversals, determine the aggregate ITC that VTL may retain on its September 2026 inputs and input services. The calculation must include the credit attributable exclusively to taxable and zero-rated supplies as well as the eligible balance of common credit. Blocked and exclusively non-business or exempt credits must remain excluded.

1. ₹6,50,000, comprising T4 and the eligible balance C3. (correct answer)
2. ₹8,00,000, comprising C1 after exclusive reversals.
3. ₹7,00,000, comprising C2 after only exempt reversal.
4. ₹8,50,000, comprising total input tax less direct non-business credit.

Answer: A — ₹6,50,000, comprising T4 and the eligible balance C3.

Explanation. From Q1, C2 = ₹6,00,000, D1 = ₹1,20,000 and D2 = ₹30,000. Thus, C3 = ₹6,00,000 − ₹1,20,000 − ₹30,000 = ₹4,50,000. T4, exclusively attributable to taxable and zero-rated supplies, is ₹2,00,000. Total eligible ITC = T4 + C3 = ₹2,00,000 + ₹4,50,000 = ₹6,50,000. T1, T2 and T3 have already been excluded before calculating common credit.

Where it goes wrong. Treating C3 as the entire eligible ITC and forgetting to add T4, which is separately eligible.

Authority. Section 17(1) and (2) of the CGST Act, 2017; Rule 42(1)(e) to (m) of the CGST Rules, 2017

Question 3 · 2 marks · Taxation - GST Ch 07: Itc · hard

VTL's production-control machine carries ITC of ₹6,00,000 and is commonly used for taxable and exempt business supplies. It is not used for non-business purposes. Under Rule 43, calculate the monthly common capital-goods credit and the amount attributable to exempt supplies when exempt turnover represents 20% of total turnover. The machine was invoiced on 1 September 2026.

1. Monthly credit ₹10,000; exempt reversal ₹2,000. (correct answer)
2. Monthly credit ₹15,000; exempt reversal ₹3,000.
3. Monthly credit ₹8,000; exempt reversal ₹1,600.
4. Monthly credit ₹12,000; exempt reversal ₹2,400.

Answer: A — Monthly credit ₹10,000; exempt reversal ₹2,000.

Explanation. Rule 43 spreads common capital-goods ITC across a useful life of 60 months. Monthly common credit = ₹6,00,000 ÷ 60 = ₹10,000. Exempt turnover ratio = ₹20,00,000 ÷ ₹1,00,00,000 = 20%. Monthly exempt attribution = ₹10,000 × 20% = ₹2,000. Accordingly, ₹2,000 is added to the output tax liability for the relevant month. The remaining ₹8,000 is attributable to taxable business supplies.

Where it goes wrong. Calculating 5% of the original capital-goods ITC every month instead of spreading ITC over 60 months.

Authority. Section 17(2) of the CGST Act, 2017; Rule 43(1)(c), (e), (g) and (h) of the CGST Rules, 2017

Question 4 · 2 marks · Taxation - GST Ch 07: Itc · hard

The LLP identifies ₹50,000 of input tax exclusively attributable to non-business activities and another ₹6,00,000 as common input tax partly attributable to business and non-business activities. Which treatment correctly applies section 17(1) and Rule 42? The common expenditure also supports exempt and taxable supplies, while the exclusively non-business expenditure has no business use.

1. Reverse ₹30,000 only, because exclusively non-business expenditure is included in D2.
2. Exclude ₹50,000 as T1 and separately calculate D2 as ₹30,000. (correct answer)
3. Exclude ₹80,000 as T1 and do not calculate any common credit.
4. Retain ₹50,000 and reverse ₹30,000 from the common credit.

Answer: B — Exclude ₹50,000 as T1 and separately calculate D2 as ₹30,000.

Explanation. ITC exclusively attributable to non-business use is T1 and is excluded in full under section 17(1). Here, T1 = ₹50,000, so this amount is not credited. Separately, common credit C2 is ₹6,00,000. Since it is partly used for non-business purposes, D2 = 5% × ₹6,00,000 = ₹30,000 under Rule 42(1)(j). Total non-business-related reduction = ₹50,000 + ₹30,000 = ₹80,000, before considering exempt-supply reversal.

Where it goes wrong. Applying the 5% factor to exclusively non-business invoices instead of excluding them entirely as T1.

Authority. Section 17(1) of the CGST Act, 2017; Rule 42(1)(b), (j) and (m) of the CGST Rules, 2017

Question 5 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. Kshetra Bank Ltd, registered in Maharashtra, is a banking company engaged in accepting deposits and extending loans and advances. It also has a separately registered branch in Karnataka under the same PAN. The bank exercised the option under section 17(4) in April 2026 and continued to use this method during the financial year. For September 2026, its otherwise eligible ITC on inputs, capital goods and input services received from persons other than its same-PAN branch was ₹10,00,000. The Karnataka branch separately supplied taxable data-processing services to the Maharashtra registration, raising an invoice carrying GST of ₹1,60,000. The bank wishes to claim credit on this branch invoice without applying the 50% restriction. Management is considering switching to the normal apportionment method in December 2026 because its taxable lending-related services have increased. Separately, Tanish Components, a manufacturing concern, became liable for GST registration from 1 August 2026. It applied for registration on 22 August 2026 and was granted registration with effect from 1 August. On 31 July, it held raw materials carrying GST of ₹1,20,000 and inputs contained in semi-finished and finished goods carrying GST of ₹1,40,000. It also possessed a production machine carrying GST of ₹80,000. All relevant stock invoices were issued within one year before the eligibility date. The company proposes to file Form GST ITC-01 on 25 August 2026. Smt. Anuradha Sen, another taxable person, obtained voluntary registration on 25 September 2026. On 24 September, she held inputs in stock carrying GST of ₹55,000 and inputs contained in finished goods carrying GST of ₹45,000. She also possessed business machinery carrying GST of ₹95,000.

Kshetra Bank Ltd has exercised the optional method under section 17(4). Its eligible ITC for September 2026, excluding the same-PAN branch supply, is ₹10,00,000. The taxable data-processing services supplied by its separately registered Karnataka branch carry GST of ₹1,60,000. Calculate the total ITC that the Maharashtra registration may claim for September.

1. ₹6,60,000, comprising 50% of ordinary ITC and full same-PAN branch credit. (correct answer)
2. ₹5,80,000, comprising 50% of all inward ITC including branch supplies.
3. ₹11,60,000, comprising the full amount of all eligible inward tax.
4. ₹8,00,000, comprising 50% of ordinary credit and half branch credit.

Answer: A — ₹6,60,000, comprising 50% of ordinary ITC and full same-PAN branch credit.

Explanation. Section 17(4) permits the bank to avail 50% of eligible monthly ITC, while the balance lapses. Ordinary eligible ITC = ₹10,00,000; permissible portion = 50% × ₹10,00,000 = ₹5,00,000. The second proviso excludes supplies between registered persons having the same PAN from this restriction. Therefore, branch credit of ₹1,60,000 is fully eligible. Total claim = ₹5,00,000 + ₹1,60,000 = ₹6,60,000.

Where it goes wrong. Applying the 50% limitation to supplies between separate registrations having the same PAN.

Authority. Section 17(4) of the CGST Act, 2017

Question 6 · 2 marks · Taxation - GST Ch 07: Itc · hard

Kshetra Bank exercised the section 17(4) option in April 2026. In December 2026, management wishes to discontinue the 50% method because its taxable business has expanded. It proposes to calculate ITC under the ordinary exempt-supply apportionment method from December onwards. Which position is legally correct for FY 2026-27?

1. The bank can withdraw its option at the beginning of any subsequent quarter.
2. The bank can withdraw the option only after submitting a revised annual return.
3. The option cannot be withdrawn during the remaining part of FY 2026-27. (correct answer)
4. The bank must continue the option for five years from its original election.

Answer: C — The option cannot be withdrawn during the remaining part of FY 2026-27.

Explanation. Section 17(4) permits the banking company to choose the prescribed 50% method instead of ordinary apportionment under section 17(2). However, the first proviso provides that once exercised, the option cannot be withdrawn during the remaining part of that financial year. Since Kshetra Bank exercised it in April 2026, the option continues through 31 March 2027. A change in the composition of taxable revenue does not create an early withdrawal facility.

Where it goes wrong. Confusing the annual option period with a quarterly review of the bank's eligible ITC method.

Authority. Section 17(4), first proviso, of the CGST Act, 2017

Question 7 · 2 marks · Taxation - GST Ch 07: Itc · medium

Tanish Components became liable for registration on 1 August 2026 and applied within the following 30 days. Its stock on 31 July carried GST of ₹1,20,000, while inputs contained in semi-finished and finished goods carried ₹1,40,000. A production machine held on that date carried GST of ₹80,000. All invoices relating to the stock were issued within one year. Calculate the credit available under section 18(1)(a).

1. ₹3,40,000, including stock, finished goods and production machinery.
2. ₹2,60,000, comprising stock and inputs contained in semi-finished or finished goods. (correct answer)
3. ₹1,20,000, comprising only raw materials held in stock.
4. ₹2,40,000, excluding the inputs contained in finished goods.

Answer: B — ₹2,60,000, comprising stock and inputs contained in semi-finished or finished goods.

Explanation. Application within 30 days of becoming liable satisfies section 18(1)(a). The relevant stock date is 31 July 2026, immediately preceding the liability date. Eligible ITC comprises raw materials ₹1,20,000 and inputs contained in semi-finished and finished goods ₹1,40,000. Section 18(1)(a) does not provide credit for capital goods. Hence, eligible ITC = ₹1,20,000 + ₹1,40,000 = ₹2,60,000. The ₹80,000 machine credit is excluded.

Where it goes wrong. Including capital goods in the initial-registration stock credit or taking stock as at the registration grant date.

Authority. Section 18(1)(a) and (2) of the CGST Act, 2017; Rule 40(1) of the CGST Rules, 2017

Question 8 · 2 marks · Taxation - GST Ch 07: Itc · hard

Smt. Anuradha Sen obtained voluntary registration on 25 September 2026. On 24 September, she held raw materials carrying GST of ₹55,000 and inputs contained in finished goods carrying GST of ₹45,000. Business machinery held on the same date carried GST of ₹95,000. All stock invoices are within one year. Determine the credit available under section 18(1)(b), assuming the other conditions are met.

1. ₹1,95,000, including the entire machinery credit.
2. ₹55,000, comprising only raw-material stock.
3. ₹1,00,000, comprising raw materials and inputs contained in finished goods. (correct answer)
4. ₹1,45,000, comprising machinery and finished-goods inputs.

Answer: C — ₹1,00,000, comprising raw materials and inputs contained in finished goods.

Explanation. A person obtaining voluntary registration under section 25(3) can claim ITC on inputs in stock and inputs contained in semi-finished or finished goods on the day immediately preceding the grant of registration. The relevant date is 24 September 2026. Eligible credit = ₹55,000 + ₹45,000 = ₹1,00,000. Section 18(1)(b) does not extend this initial stock entitlement to capital goods. Accordingly, the machinery credit of ₹95,000 is excluded.

Where it goes wrong. Using the date of application rather than the grant date, and including capital goods under voluntary registration.

Authority. Section 18(1)(b) and (2) of the CGST Act, 2017; Rule 40(1) of the CGST Rules, 2017

Question 9 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. Nandini Real Estates and Infrastructure Pvt Ltd, registered in Karnataka, manufactures construction materials and undertakes taxable infrastructure contracts. It was paying tax under the composition scheme until 30 June 2026 and became liable under the regular scheme from 1 July 2026. On 30 June, its raw-material stock carried GST of ₹90,000 and inputs contained in semi-finished and finished goods carried GST of ₹1,10,000. It also held a production machine purchased under an invoice dated 1 January 2026, on which ITC of ₹3,00,000 had been paid. The machine was still being used in manufacturing. All stock invoices were within one year of the relevant eligibility date. A separate product line had been exempt from GST until 30 September 2026. From 1 October 2026, the exemption was withdrawn and the products became taxable. On 30 September, inputs in stock and inputs contained in finished goods exclusively relating to this product line carried GST of ₹60,000 and ₹50,000 respectively. A machine exclusively used for manufacturing this previously exempt product had been purchased on 1 July 2025 and carried GST of ₹2,00,000. All these invoices were within the statutory one-year period. Nandini also sold a production machine on 1 October 2026. It had been purchased on 1 October 2024, and ITC of ₹4,80,000 had been availed. Its sale transaction value was ₹20,00,000, taxable at 18%. The company intends to determine its liability under section 18(6) by comparing the credit attributable to the remaining useful life with GST on the transaction value. For the composition-to-regular transition, Nandini filed Form GST ITC-01 on 25 July 2026 and has a total stock and capital-goods credit claim exceeding ₹2,00,000.

Nandini switched from composition levy to the regular scheme on 1 July 2026. Its stock of inputs carried GST of ₹90,000, inputs contained in semi-finished and finished goods carried GST of ₹1,10,000, and a production machine purchased on 1 January 2026 carried GST of ₹3,00,000. Determine its aggregate eligible ITC on the transition date. The machine's invoice is within one year.

1. ₹5,00,000, comprising all stock and the unreduced machine tax.
2. ₹4,70,000, comprising full stock credit and reduced machine credit. (correct answer)
3. ₹4,55,000, comprising stock credit and machine credit reduced by 15%.
4. ₹4,40,000, comprising stock credit and machine credit reduced by 20%.

Answer: B — ₹4,70,000, comprising full stock credit and reduced machine credit.

Explanation. Stock credit = ₹90,000 + ₹1,10,000 = ₹2,00,000. The machine invoice is dated 1 January 2026. From that date to the transition on 1 July 2026, two quarters have elapsed. Reduction = 2 × 5% = 10%. Eligible machine credit = ₹3,00,000 × 90% = ₹2,70,000. Total transition credit = ₹2,00,000 + ₹2,70,000 = ₹4,70,000. Capital goods are reduced, whereas stock inputs qualify in full.

Where it goes wrong. Applying the capital-goods reduction to raw materials and semi-finished or finished stock as well.

Authority. Section 18(1)(c) and (2) of the CGST Act, 2017; Rule 40(1)(a) of the CGST Rules, 2017

Question 10 · 2 marks · Taxation - GST Ch 07: Itc · hard

Nandini's previously exempt product line became taxable from 1 October 2026. On 30 September, inputs in stock carried GST of ₹60,000 and inputs contained in finished goods carried GST of ₹50,000. A machine used exclusively for that previously exempt product had been purchased on 1 July 2025 and carried GST of ₹2,00,000. Calculate the aggregate credit available under section 18(1)(d).

1. ₹2,60,000, comprising stock and capital goods without reduction.
2. ₹2,10,000, comprising full stock credit and half the machine credit.
3. ₹2,40,000, comprising reduced stock and full machine credit.
4. ₹2,60,000 less ₹50,000, comprising ₹1,10,000 stock and ₹1,50,000 machine credit. (correct answer)

Answer: D — ₹2,60,000 less ₹50,000, comprising ₹1,10,000 stock and ₹1,50,000 machine credit.

Explanation. Eligible stock ITC = ₹60,000 + ₹50,000 = ₹1,10,000. The machine is exclusively used for the previously exempt supply, satisfying section 18(1)(d). From 1 July 2025 to 1 October 2026, five quarters or parts have elapsed. Reduction = 5 × 5% = 25%. Eligible machine ITC = ₹2,00,000 × 75% = ₹1,50,000. Aggregate credit = ₹1,10,000 + ₹1,50,000 = ₹2,60,000.

Where it goes wrong. Including capital goods used commonly across exempt and taxable activities, or failing to reduce the credit for the elapsed quarters.

Authority. Section 18(1)(d) and (2) of the CGST Act, 2017; Rule 40(1)(a) of the CGST Rules, 2017

Question 11 · 2 marks · Taxation - GST Ch 07: Itc · hard

Nandini sold a production machine on 1 October 2026 for ₹20,00,000 plus applicable GST at 18%. The machine had been purchased on 1 October 2024 and ITC of ₹4,80,000 had been availed. Its useful life for the statutory computation is five years. Determine the amount payable under section 18(6), comparing the credit attributable to the remaining useful life with GST on the sale transaction value.

1. ₹2,40,000, being half the original ITC.
2. ₹2,88,000, being the ITC attributable to 36 remaining months.
3. ₹3,00,000, being the depreciated purchase tax balance.
4. ₹3,60,000, being higher GST on the transaction value. (correct answer)

Answer: D — ₹3,60,000, being higher GST on the transaction value.

Explanation. Total useful life = 60 months. Used life from 1 October 2024 to 1 October 2026 = 24 months. Remaining life = 36 months. ITC attributable to remaining life = ₹4,80,000 × 36/60 = ₹2,88,000. GST on transaction value = ₹20,00,000 × 18% = ₹3,60,000. Section 18(6) requires the higher amount. Therefore, amount payable = ₹3,60,000. The transaction-value tax exceeds the remaining-life credit.

Where it goes wrong. Paying only the reduced ITC balance without comparing it with GST calculated on the transaction value.

Authority. Section 18(6) of the CGST Act, 2017; Rule 44(6) of the CGST Rules, 2017

Question 12 · 2 marks · Taxation - GST Ch 07: Itc · medium

Nandini filed Form GST ITC-01 on 25 July 2026 after becoming eligible for stock and capital-goods credit on 1 July 2026. Its aggregate credit claim on account of CGST, SGST and IGST exceeds ₹2,00,000. Which statement correctly identifies the declaration deadline and supporting certification requirement under Rule 40?

1. Declaration by 30 September; certification is required only above ₹5,00,000.
2. Declaration by 30 July; certification is unnecessary for any capital-goods claim.
3. Declaration by 31 August; certification is required only above ₹10,00,000.
4. Declaration by 31 July; certification by a practicing CA or Cost Accountant is required. (correct answer)

Answer: D — Declaration by 31 July; certification by a practicing CA or Cost Accountant is required.

Explanation. Eligibility arose on 1 July 2026. Rule 40 requires the electronic Form GST ITC-01 declaration within 30 days from becoming eligible. The deadline is 31 July 2026. Further, Rule 40(1)(d) requires certification by a practicing Chartered Accountant or Cost Accountant where the aggregate claim across the relevant tax heads exceeds ₹2,00,000. Nandini's claim exceeds this threshold. Filing on 25 July is within the prescribed period.

Where it goes wrong. Using the date of filing the registration-related or transition application as the starting point instead of the date of ITC eligibility.

Authority. Section 18(1)(c) of the CGST Act, 2017; Rule 40(1)(b) and (d) of the CGST Rules, 2017

Question 13 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Aryan Steels Ltd has monthly input tax of ₹8,00,000 on inputs and input services. Of this, ₹40,000 relates exclusively to non-business use, ₹60,000 exclusively to exempt supplies, ₹20,000 to blocked inward supplies and ₹2,00,000 exclusively to taxable supplies. The remaining common credit is used partly for non-business purposes. Exempt turnover is 25% of total turnover. Calculate the total eligible credit under Rule 42 after both common-credit reversals.

1. ₹5,36,000, comprising exclusive taxable credit and remaining common credit. (correct answer)
2. ₹5,60,000, after reversing only the exempt-supply portion.
3. ₹4,80,000, after reversing the exclusive non-business and exempt portions.
4. ₹6,00,000, after deducting only blocked credit.

Answer: A — ₹5,36,000, comprising exclusive taxable credit and remaining common credit.

Explanation. C1 = ₹8,00,000 − (₹40,000 + ₹60,000 + ₹20,000) = ₹6,80,000. C2 = ₹6,80,000 − ₹2,00,000 = ₹4,80,000. D1 = 25% × ₹4,80,000 = ₹1,20,000. D2 = 5% × ₹4,80,000 = ₹24,000. C3 = ₹4,80,000 − ₹1,44,000 = ₹3,36,000. Total eligible credit = T4 ₹2,00,000 + C3 ₹3,36,000 = ₹5,36,000.

Where it goes wrong. Using the total ITC figure for the 5% reversal or forgetting to include exclusively taxable credit in the final eligible amount.

Authority. Section 17(1) and (2) of the CGST Act, 2017; Rule 42(1) of the CGST Rules, 2017

Question 14 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Nandini Real Estates has taxable turnover of ₹52,00,000, zero-rated turnover of ₹16,00,000 and exempt turnover of ₹12,00,000 during September 2026. After direct invoice-level attribution, its common input and input-service credit is ₹2,40,000. There is no common non-business use. Calculate the exempt-supply reversal under Rule 42. For this purpose, zero-rated supplies qualify within taxable supplies under section 17(2).

1. ₹48,000, because exempt turnover is measured against taxable turnover alone.
2. ₹60,000, because taxable and zero-rated turnover are both excluded.
3. ₹36,000, because total turnover includes taxable and zero-rated supplies. (correct answer)
4. ₹24,000, because only the zero-rated proportion is reversed.

Answer: C — ₹36,000, because total turnover includes taxable and zero-rated supplies.

Explanation. Total turnover = ₹52,00,000 + ₹16,00,000 + ₹12,00,000 = ₹80,00,000. Exempt turnover ratio = ₹12,00,000 ÷ ₹80,00,000 = 15%. Rule 42 reversal = 15% × common credit of ₹2,40,000 = ₹36,000. Zero-rated supplies are treated as taxable supplies for this attribution and therefore form part of total turnover, but not exempt turnover. No D2 reversal applies because common non-business use is absent.

Where it goes wrong. Excluding zero-rated turnover from the denominator or treating zero-rated supplies as exempt supplies.

Authority. Section 17(2) of the CGST Act, 2017; Rule 42(1)(i) and (m) of the CGST Rules, 2017

Question 15 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered manufacturing company purchased a production-control system for ₹9,00,000 plus GST and uses it commonly for taxable and exempt production. The system is not used for non-business purposes and has a statutory useful life of 60 months. The exempt-supply ratio for the September 2026 tax period is 30%. Determine the amount of monthly ITC attributable to exempt supplies under Rule 43.

1. ₹15,000, being the full monthly common credit.
2. ₹4,500, being 30% of the monthly common credit. (correct answer)
3. ₹45,000, being 5% of the original input tax.
4. ₹3,000, being 20% of the monthly common credit.

Answer: B — ₹4,500, being 30% of the monthly common credit.

Explanation. GST on capital goods = ₹9,00,000. Monthly common credit = ₹9,00,000 ÷ 60 = ₹15,000. Exempt-supply ratio = 30%. Monthly amount attributable to exempt supplies = ₹15,000 × 30% = ₹4,500. Under Rule 43, the exempt attribution is added to the output tax liability during the useful life of the capital goods. The remaining monthly credit is ₹10,500.

Where it goes wrong. Applying the exempt turnover percentage directly to the original capital-goods ITC rather than the monthly common credit.

Authority. Section 17(2) of the CGST Act, 2017; Rule 43(1)(c), (e), (g) and (h) of the CGST Rules, 2017

Question 16 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Dakshin Finance Ltd is a non-banking financial company engaged in accepting deposits and extending loans. It has exercised the section 17(4) option for FY 2026-27. Its otherwise eligible ITC for October 2026 on supplies from unrelated registered suppliers is ₹8,00,000. It also receives taxable services carrying GST of ₹1,20,000 from another registered establishment under the same PAN. Calculate the maximum credit available for October.

1. ₹4,00,000, because all ITC is restricted to half.
2. ₹4,60,000, because the same-PAN supply is also halved.
3. ₹9,20,000, because the bank may retain the entire ITC.
4. ₹5,20,000, because only unrelated-supplier credit is restricted to 50%. (correct answer)

Answer: D — ₹5,20,000, because only unrelated-supplier credit is restricted to 50%.

Explanation. The 50% method applies to eligible ITC on unrelated inward supplies. Permissible amount = ₹8,00,000 × 50% = ₹4,00,000. The second proviso to section 17(4) excludes tax paid on supplies between registered persons having the same PAN. Thus, ₹1,20,000 is claimable in full. Aggregate eligible ITC = ₹4,00,000 + ₹1,20,000 = ₹5,20,000. The residual unrelated credit lapses under the selected method.

Where it goes wrong. Applying the 50% restriction to intra-PAN branch supplies or treating the option as a complete denial of credit.

Authority. Section 17(4) of the CGST Act, 2017

Question 17 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Suryakant Industries became liable for registration on 1 August 2026 and applied for registration on 25 August 2026. Its stock on 31 July included inputs carrying GST of ₹70,000, inputs contained in semi-finished and finished goods carrying GST of ₹90,000, and inputs carrying GST of ₹20,000 under invoices issued on 15 June 2025. A machine held on the same date carried GST of ₹60,000. Determine the credit available under section 18(1)(a), considering the invoice-age condition.

1. ₹1,60,000, excluding the old invoice and capital goods. (correct answer)
2. ₹2,20,000, including the older stock invoice.
3. ₹1,80,000, including only the inputs and capital goods.
4. ₹2,40,000, including all stock and the production machine.

Answer: A — ₹1,60,000, excluding the old invoice and capital goods.

Explanation. Application on 25 August is within 30 days from liability on 1 August. The relevant stock date is 31 July 2026. Inputs of ₹70,000 and goods containing inputs of ₹90,000 are eligible, totalling ₹1,60,000. The ₹20,000 invoice dated 15 June 2025 is older than one year on the eligibility date and is excluded under section 18(2). The ₹60,000 capital machine is also excluded under section 18(1)(a).

Where it goes wrong. Including an invoice older than one year or capital goods in the initial registration stock credit.

Authority. Section 18(1)(a) and (2) of the CGST Act, 2017; Rule 40(1) of the CGST Rules, 2017

Question 18 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

M/s Sen Traders obtained voluntary registration on 15 October 2026. Its stock on 14 October carried GST of ₹40,000 on inputs held as such and ₹75,000 on inputs contained in semi-finished and finished goods. It also held a delivery machine carrying GST of ₹1,50,000. All stock invoices were issued within one year. Which amount is eligible under section 18(1)(b), assuming the other requirements are satisfied?

1. ₹2,65,000, including all stock and capital-goods credit.
2. ₹1,50,000, comprising the delivery machine alone.
3. ₹1,15,000, comprising stock and inputs contained in goods. (correct answer)
4. ₹40,000, comprising only inputs held in stock.

Answer: C — ₹1,15,000, comprising stock and inputs contained in goods.

Explanation. Under section 18(1)(b), a person obtaining voluntary registration may claim ITC on inputs in stock and inputs contained in semi-finished or finished goods immediately before the grant date. Here, the snapshot date is 14 October 2026. Eligible credit = ₹40,000 + ₹75,000 = ₹1,15,000. Voluntary registration does not permit credit on capital goods held on the grant date. Therefore, the machine's ₹1,50,000 tax component is excluded.

Where it goes wrong. Applying the wider capital-goods entitlement available to composition-to-regular transitions to voluntary registration.

Authority. Section 18(1)(b) and (2) of the CGST Act, 2017

Question 19 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered manufacturer ceases to pay tax under the composition scheme and becomes liable under the regular scheme on 1 October 2026. It held capital goods carrying ITC of ₹4,00,000 under an invoice dated 1 April 2026. The machinery is still held and used in taxable manufacturing on 30 September. Calculate the credit available on this capital asset under section 18(1)(c), before adding eligible stock-input credit.

1. ₹4,00,000, because capital goods qualify without reduction.
2. ₹3,60,000, after reduction of 10% for two quarters. (correct answer)
3. ₹3,40,000, after reduction of 15% for three quarters.
4. ₹3,20,000, after reduction of 20% for four quarters.

Answer: B — ₹3,60,000, after reduction of 10% for two quarters.

Explanation. For a composition-to-regular transition, section 18(1)(c) permits capital-goods credit after reduction of 5 percentage points per quarter or part thereof from the invoice date. Invoice date is 1 April 2026 and transition date is 1 October 2026. Two quarters have elapsed: April-June and July-September. Reduction = 2 × 5% = 10%. Eligible capital-goods credit = ₹4,00,000 × 90% = ₹3,60,000.

Where it goes wrong. Using the reduced-life formula for sale of capital goods instead of the 5-percentage-point quarterly reduction prescribed for this transition.

Authority. Section 18(1)(c) of the CGST Act, 2017; Rule 40(1)(a) of the CGST Rules, 2017

Question 20 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered manufacturer produces an item that was exempt until it became taxable on 1 October 2026. A machine used exclusively for that item was purchased under an invoice dated 1 July 2025 and carried GST of ₹2,00,000. The machine remained in the business on 30 September 2026. Calculate the eligible capital-goods credit when the product line becomes taxable, applying section 18(1)(d).

1. ₹2,00,000, because the supply has become taxable.
2. ₹1,25,000, after deducting 37.5% for elapsed use.
3. ₹1,75,000, after deducting 12.5% for elapsed use.
4. ₹1,50,000, after five quarters of 5% reduction. (correct answer)

Answer: D — ₹1,50,000, after five quarters of 5% reduction.

Explanation. The machine is exclusively used for the supply that becomes taxable, so it qualifies under section 18(1)(d). From 1 July 2025 to 1 October 2026, five quarters or parts have elapsed. Reduction = 5 × 5% = 25%. Eligible ITC = ₹2,00,000 × 75% = ₹1,50,000. The reduced amount is available on the date immediately preceding the date from which the supply becomes taxable, subject to the other statutory conditions.

Where it goes wrong. Claiming the entire historical tax component without reducing the capital-goods credit for elapsed quarters.

Authority. Section 18(1)(d) of the CGST Act, 2017; Rule 40(1)(a) of the CGST Rules, 2017

Question 21 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered business purchased an industrial machine on 1 July 2024 and availed ITC of ₹6,00,000. It sold the machine on 1 July 2026 for ₹18,00,000 plus applicable GST at 18%. The machine has a statutory useful life of five years, and no earlier reversal has been made. Determine the amount payable under section 18(6), applying Rule 44(6).

1. ₹3,60,000, being higher than GST on transaction value. (correct answer)
2. ₹2,16,000, being the GST on the transaction value.
3. ₹2,40,000, being 40% of the original credit.
4. ₹6,00,000, being the original ITC availed.

Answer: A — ₹3,60,000, being higher than GST on transaction value.

Explanation. Total useful life = 60 months. Used life = 24 months, leaving 36 months. Remaining-life credit = ₹6,00,000 × 36/60 = ₹3,60,000. GST on transaction value = ₹18,00,000 × 18% = ₹3,24,000. Section 18(6) requires payment of the higher amount. Therefore, the business must pay ₹3,60,000, which exceeds the tax computed on the transaction value.

Where it goes wrong. Choosing the transaction-value tax automatically instead of comparing it with ITC attributable to the remaining useful life.

Authority. Section 18(6) of the CGST Act, 2017; Rule 44(6) of the CGST Rules, 2017

Question 22 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A company sells a production machine on 1 April 2026. It had purchased the machine on 1 April 2025 and availed ITC of ₹2,40,000. The sale transaction value is ₹12,00,000 plus GST at 18%. Assume a useful life of 60 months and no prior adjustment to ITC. Calculate the amount payable under section 18(6) by applying the remaining-useful-life method and comparing the result with GST on the transaction value.

1. ₹1,44,000, being the remaining credit on the machine.
2. ₹1,92,000, being the reduced original credit.
3. ₹2,16,000, being higher GST on the transaction value. (correct answer)
4. ₹2,40,000, being the entire original credit.

Answer: C — ₹2,16,000, being higher GST on the transaction value.

Explanation. The machine was used for 12 months out of 60 months, leaving 48 months. Remaining-life ITC = ₹2,40,000 × 48/60 = ₹1,92,000. GST on the sale transaction value = ₹12,00,000 × 18% = ₹2,16,000. Since section 18(6) requires the higher of these amounts, payable tax is ₹2,16,000. The transaction-value tax exceeds the remaining-life credit by ₹24,000.

Where it goes wrong. Assuming that the remaining-life credit must always exceed transaction-value tax, regardless of the sale price.

Authority. Section 18(6) of the CGST Act, 2017; Rule 44(6) of the CGST Rules, 2017

Question 23 · 2 marks · Taxation - GST Ch 07: Itc · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A registered person becomes eligible for stock credit under section 18(1)(a) on 1 August 2026 and has a total claim of ₹2,00,000 across CGST, SGST and IGST. It proposes to furnish Form GST ITC-01 on 20 August 2026. Under Rule 40, determine whether the declaration is within time and whether certification by a practicing Chartered Accountant or Cost Accountant is required.

1. Late filing, and certification is required because the claim reaches ₹2,00,000.
2. Timely filing, and certification is not required at exactly ₹2,00,000. (correct answer)
3. Timely filing, but certification is required for every stock-credit declaration.
4. Late filing, because the declaration must be submitted before registration is granted.

Answer: B — Timely filing, and certification is not required at exactly ₹2,00,000.

Explanation. Eligibility arises on 1 August 2026. Form GST ITC-01 must be furnished within 30 days, and filing on 20 August is within time. Rule 40(1)(d) requires CA or Cost Accountant certification only when the aggregate claim exceeds ₹2,00,000. A claim of exactly ₹2,00,000 does not exceed the threshold. Therefore, the declaration is timely and the specified certification is not mandatory.

Where it goes wrong. Reading the threshold as ₹2,00,000 or more instead of strictly more than ₹2,00,000.

Authority. Section 18(1)(a) of the CGST Act, 2017; Rule 40(1)(b) and (d) of the CGST Rules, 2017

Question 24 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Smt. Anuradha Sen became liable for registration on 1 August 2026 but applied for registration only on 1 September 2026, the thirty-first day after the liability date. She was subsequently granted registration and held inputs in stock on 31 July carrying GST of ₹1,20,000. She argues that she should receive credit because the goods were acquired before the liability date and were used in taxable business. Determine whether section 18(1)(a) applies.

1. Full credit, because stock existed before the date of liability.
2. Half credit, because the application was delayed by only one day.
3. Full credit, provided Form GST ITC-01 is filed within 30 days of grant.
4. No credit under section 18(1)(a), because the registration application missed the 30-day condition. (correct answer)

Answer: D — No credit under section 18(1)(a), because the registration application missed the 30-day condition.

Explanation. Section 18(1)(a) requires the person to apply for registration within 30 days from the date on which liability arises and obtain registration. The liability date is 1 August 2026. The application on 1 September is beyond 30 days. Consequently, the condition under section 18(1)(a) is not fulfilled, and stock credit of ₹1,20,000 cannot be claimed through this provision. Timely filing of Form GST ITC-01 cannot cure the missed eligibility condition.

Where it goes wrong. Treating the 30-day Form GST ITC-01 filing period as an extension of the separate 30-day registration-application condition.

Authority. Section 18(1)(a) of the CGST Act, 2017

Question 25 · 2 marks · Taxation - GST Ch 07: Itc · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Aryan Steels Ltd purchased a specialised production die and availed ITC of ₹1,80,000. After a period of use, it sold the die as scrap for a transaction value of ₹50,000 plus GST at 18%. The die is specifically a mould or die falling within the proviso to section 18(6). Determine the amount payable on its supply as scrap, having regard to the special statutory treatment.

1. ₹9,000, being GST on the scrap transaction value. (correct answer)
2. ₹1,80,000, being the entire ITC originally availed.
3. ₹1,44,000, being 80% of the original ITC.
4. The higher of ₹9,000 and the remaining useful-life ITC.

Answer: A — ₹9,000, being GST on the scrap transaction value.

Explanation. The proviso to section 18(6) provides a special treatment where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap. In such a case, the taxpayer may pay tax on the transaction value. Scrap transaction value = ₹50,000. GST payable = ₹50,000 × 18% = ₹9,000. The ordinary comparison between remaining-life ITC and transaction-value GST does not govern this specified scrap disposal. Accordingly, ₹9,000 is payable.

Where it goes wrong. Applying the ordinary higher-of-two-amounts test without recognising the special proviso for specified capital goods supplied as scrap.

Authority. Section 18(6), proviso, of the CGST Act, 2017; Rule 44(6) of the CGST Rules, 2017