CA Inter Taxation MCQ Test 2 (Income-tax + GST): answer key

Question 1 · 2 marks · Chapter 3 Unit 3: Profits and Gains of Business or Profession · easy

Scenario. Mr. Raghav Mehta, a resident individual, operates a wholesale electrical goods business in Indore under the name Mehta Electricals. His turnover for the previous year 2025-26 is ₹2,86,00,000, of which ₹12,00,000 was received in cash and the remaining amount was received through prescribed electronic modes before the due date under section 139(1). He had first opted for presumptive taxation under section 44AD in AY 2025-26. During the current year, he is considering declaring business income under the presumptive scheme, although his accountant estimates that the actual profit as per books would be lower. His total income, excluding business income, is above the maximum amount not chargeable to tax. For the purposes of the following questions, assume that all other eligibility conditions are satisfied.

Determine whether Mr. Raghav is eligible to declare his business income under section 44AD for AY 2026-27, considering the turnover and cash-receipt conditions. Round the cash-receipt percentage to two decimal places.

1. Not eligible, since the maximum turnover limit under section 44AD is ₹2 crore in every case.
2. Not eligible, since cash receipts exceed 4% of total turnover.
3. Eligible, since turnover does not exceed ₹3 crore and cash receipts do not exceed 5% of total turnover. (correct answer)
4. Eligible only if cash receipts are completely eliminated during the previous year.

Answer: C — Eligible, since turnover does not exceed ₹3 crore and cash receipts do not exceed 5% of total turnover.

Working. Cash receipts = ₹12,00,000 Total turnover = ₹2,86,00,000 Cash receipts percentage = (12,00,000 / 2,86,00,000) × 100 = 4.1958% = 4.20% (rounded to two decimal places) Since 4.20% ≤ 5% and turnover of ₹2.86 crore ≤ ₹3 crore, the enhanced turnover condition is satisfied.

Explanation. The enhanced turnover threshold of ₹3 crore applies where aggregate cash receipts do not exceed 5% of total turnover or gross receipts. Raghav's cash receipts are approximately 4.20% of turnover, and his turnover is ₹2.86 crore. Both conditions are satisfied. Option (a) incorrectly applies the ordinary ₹2 crore threshold without considering the higher threshold available under the cash-receipt condition.

Where it goes wrong. Applying the ordinary ₹2 crore turnover ceiling without considering the higher ₹3 crore threshold subject to the 5% cash-receipt condition.

Authority. Chapter 3 Unit 3, Section 44AD, eligibility and enhanced turnover threshold, study material pp. 3.337-3.338

Question 2 · 2 marks · Chapter 3 Unit 3: Profits and Gains of Business or Profession · medium

Assuming Mr. Raghav exercises the option under section 44AD, calculate his presumptive business income for AY 2026-27.

1. ₹22,88,000
2. ₹17,16,000
3. ₹17,88,000
4. ₹17,40,000 (correct answer)

Answer: D — ₹17,40,000

Working. Cash receipts = ₹12,00,000 Presumptive income on cash receipts = ₹12,00,000 × 8% = ₹96,000 Qualifying electronic receipts = ₹2,86,00,000 − ₹12,00,000 = ₹2,74,00,000 Presumptive income on electronic receipts = ₹2,74,00,000 × 6% = ₹16,44,000 Total presumptive income = ₹96,000 + ₹16,44,000 = ₹17,40,000. Total presumptive income = ₹17,40,000.

Explanation. Presumptive income is 8% of the receipts in cash and 6% of the receipts through prescribed banking or electronic modes within the stipulated time. Cash portion: ₹12,00,000 × 8% = ₹96,000. Electronic portion: ₹2,74,00,000 × 6% = ₹16,44,000. Total presumptive income is ₹17,40,000. Option (b) wrongly applies 6% to the whole turnover and option (a) wrongly applies 8% to the whole turnover.

Where it goes wrong. Applying 8% to all turnover or applying 6% to cash receipts instead of qualifying electronic receipts.

Authority. Chapter 3 Unit 3, Section 44AD, computation of presumptive income, study material pp. 3.337-3.338

Question 3 · 2 marks · Chapter 3 Unit 3: Profits and Gains of Business or Profession · hard

Suppose Mr. Raghav declares business income lower than the presumptive income under section 44AD for AY 2026-27 and satisfies the condition relating to total income exceeding the maximum amount not chargeable to tax. What is the consequence for his eligibility to use section 44AD in subsequent assessment years?

1. He cannot claim section 44AD for the five assessment years immediately succeeding AY 2026-27, namely AY 2027-28 to AY 2031-32. (correct answer)
2. He can continue claiming section 44AD in AY 2027-28 by declaring at least 6% of turnover.
3. He cannot claim section 44AD for the next three assessment years only.
4. He loses eligibility permanently for all subsequent assessment years.

Answer: A — He cannot claim section 44AD for the five assessment years immediately succeeding AY 2026-27, namely AY 2027-28 to AY 2031-32.

Working. Assessment year of lower declaration = AY 2026-27. Five immediately succeeding assessment years: 1. AY 2027-28 2. AY 2028-29 3. AY 2029-30 4. AY 2030-31 5. AY 2031-32 The assessee cannot claim the benefit of section 44AD during these five subsequent assessment years, subject to the statutory conditions.

Explanation. Where an eligible assessee declares profits lower than the presumptive profits under section 44AD and the prescribed total-income condition is satisfied, the assessee becomes ineligible for the presumptive scheme for five subsequent assessment years. Since the lower declaration occurs in AY 2026-27, the restriction applies from AY 2027-28 through AY 2031-32. Option (c) incorrectly shortens the statutory restriction, while permanent exclusion under option (d) is also incorrect.

Where it goes wrong. Counting the five-year restriction from the year of lower declaration incorrectly, or confusing it with a permanent disqualification.

Authority. Chapter 3 Unit 3, Section 44AD, restriction following withdrawal from presumptive taxation, study material pp. 3.338-3.340

Question 4 · 2 marks · Chapter 3 Unit 4: Capital Gains · easy

Scenario. Ms. Kavya Nair, a resident individual, made investments in listed equity shares and an immovable property during the previous year 2025-26. She purchased listed equity shares of an Indian company on 10 June 2024 and sold them on 20 August 2025. Securities transaction tax was paid on both acquisition and transfer. Her long-term capital gain from these shares, after deducting eligible transfer expenses, is ₹2,05,000. Separately, she sold a plot of land on 1 October 2025, resulting in a long-term capital gain of ₹72,00,000. The land was acquired as a long-term capital asset. On 1 February 2026, she invested ₹55,00,000 in eligible bonds issued by NHAI, redeemable after five years. Assume that the investment satisfies all other conditions prescribed for exemption under section 54EC.

Determine the nature of the capital gain arising from the sale of Ms. Kavya's listed equity shares on 20 August 2025, considering their acquisition date.

1. Short-term capital gain, since the shares were held for not more than 24 months.
2. Long-term capital gain, since listed equity shares are treated as long-term capital assets when held for more than 12 months. (correct answer)
3. Short-term capital gain, since the shares were held for less than 36 months.
4. Long-term capital gain only if the shares were held for more than 24 months.

Answer: B — Long-term capital gain, since listed equity shares are treated as long-term capital assets when held for more than 12 months.

Working. Date of acquisition = 10 June 2024 Date of transfer = 20 August 2025 Holding period exceeds 12 months. Therefore, the shares are long-term capital assets.

Explanation. Under section 2(42A), listed securities on a recognised stock exchange are short-term capital assets when held for not more than 12 months. Shares acquired on 10 June 2024 and transferred on 20 August 2025 were held for more than 12 months. They therefore constitute long-term capital assets. Option (a) incorrectly applies the general 24-month holding period applicable to other capital assets.

Where it goes wrong. Applying the general 24-month holding period to listed equity shares instead of the 12-month period.

Authority. Chapter 3 Unit 4, Sections 2(42A) and 2(29A), classification of short-term and long-term capital assets, study material p. 3.379

Question 5 · 2 marks · Chapter 3 Unit 4: Capital Gains · medium

Calculate the tax payable on Ms. Kavya's long-term capital gain from listed equity shares under section 112A, ignoring surcharge and health and education cess. Assume no other adjustments are required.

1. ₹25,625
2. ₹2,05,000
3. ₹12,500
4. ₹10,000 (correct answer)

Answer: D — ₹10,000

Working. Long-term capital gain = ₹2,05,000 Less: Threshold under section 112A = ₹1,25,000 Taxable LTCG = ₹80,000 Tax = ₹80,000 × 12.5% = ₹10,000. Surcharge and cess are ignored as instructed.

Explanation. Section 112A taxes eligible long-term capital gains exceeding ₹1,25,000 at 12.5%. Kavya's taxable gain under this provision is ₹80,000 after applying the annual threshold. Tax is therefore ₹10,000. Option (a) incorrectly applies 12.5% to the entire capital gain without reducing the threshold, while option (c) uses an incorrect taxable amount.

Where it goes wrong. Ignoring the ₹1,25,000 threshold or applying the 12.5% rate to the entire gain.

Authority. Chapter 3 Unit 4, Section 112A, rate of tax and threshold for long-term capital gains, study material pp. 3.371 and 3.469

Question 6 · 2 marks · Chapter 3 Unit 4: Capital Gains · hard

Determine the amount of long-term capital gain chargeable to tax after allowing exemption under section 54EC for Ms. Kavya's investment in NHAI bonds. Assume all statutory conditions are satisfied and ignore other exemptions.

1. ₹22,00,000 (correct answer)
2. ₹27,00,000
3. ₹17,00,000
4. Nil

Answer: A — ₹22,00,000

Working. Long-term capital gain = ₹72,00,000 Amount invested in eligible NHAI bonds = ₹55,00,000 Maximum eligible investment under section 54EC = ₹50,00,000 Exemption = Lower of: (c) Capital gain: ₹72,00,000 (a) Eligible investment after statutory ceiling: ₹50,00,000 Exemption = ₹50,00,000 Taxable LTCG = ₹72,00,000 − ₹50,00,000 = ₹22,00,000.

Explanation. Section 54EC allows exemption to the extent of the lower of the eligible capital gain and the amount invested in specified bonds, subject to an aggregate investment ceiling of ₹50 lakh across the relevant previous year and subsequent previous year. Although Kavya invested ₹55 lakh within six months, the exemption cannot exceed ₹50 lakh. The taxable gain is therefore ₹22 lakh. Option (c) incorrectly allows the entire investment as an exemption.

Where it goes wrong. Allowing the full ₹55 lakh investment as exemption instead of applying the ₹50 lakh aggregate statutory ceiling.

Authority. Chapter 3 Unit 4, Section 54EC, quantum of exemption, investment period and maximum investment limit, study material pp. 3.442-3.443

Question 7 · 2 marks · Chapter 7: Advance Tax, Tax Deduction at Source and Tax Collection at Source · medium

Scenario. Orion Technologies Ltd., an Indian company, engaged a resident chartered accountant, Mr. Dev Malhotra, for professional consultancy services during the previous year 2025-26. The company paid him ₹42,000 in June 2025 and subsequently credited another ₹18,000 to his account under the heading 'Professional Consultancy Charges' in February 2026. The latter amount was credited to a suspense account pending final settlement. Both amounts relate to professional services.

Determine the TDS liability of Orion Technologies Ltd. under section 194J, assuming Mr. Dev has furnished his PAN and there are no other payments during the financial year. What amount of tax should be deducted and at what point?

1. No TDS is required because neither individual payment exceeds ₹50,000.
2. ₹4,200, deductible only on the first payment of ₹42,000.
3. ₹6,000, deductible when the additional ₹18,000 is credited to the suspense account in February 2026. (correct answer)
4. ₹1,800, deductible only on the additional ₹18,000.

Answer: C — ₹6,000, deductible when the additional ₹18,000 is credited to the suspense account in February 2026.

Working. First payment = ₹42,000 Subsequent credit = ₹18,000 Aggregate professional fees = ₹60,000 Threshold under section 194J = ₹50,000 Since ₹60,000 exceeds ₹50,000, TDS is attracted. TDS rate for professional services = 10% TDS = ₹60,000 × 10% = ₹6,000. Time of deduction: February 2026, when the additional amount is credited to the suspense account and the aggregate payment crosses the threshold.

Explanation. Professional fees exceeding ₹50,000 in aggregate during the financial year attract TDS under section 194J at 10%. The aggregate professional fee is ₹60,000. Credit to a suspense account is treated as credit to the payee, and deduction is required at the earlier of credit or payment. Thus, ₹6,000 is deductible when the February credit takes the aggregate above the threshold. Option (a) incorrectly considers each payment separately.

Where it goes wrong. Testing the ₹50,000 threshold separately for each payment and ignoring the rule treating suspense-account credit as payee credit.

Authority. Chapter 7, Section 194J, professional services, threshold, rate and time of deduction, study material pp. 7.35-7.36

Question 8 · 1 marks · Chapter 4: Income of Other Persons Included in Assessee's Total Income · easy

Scenario. Mr. Arvind Rao and his wife have a minor son, aged 16 years. During the previous year 2025-26, their son earned ₹90,000 by independently performing at music competitions and composing original musical arrangements. The income arose entirely from his own musical skill and talent. His parents have substantial taxable income from their respective occupations.

In whose hands should the ₹90,000 earned by Mr. Arvind's minor son be assessed under the clubbing provisions of the Income-tax Act, 1961?

1. Equally in the hands of both parents.
2. In the hands of the minor son, since the income arises from an activity involving his own skill and talent. (correct answer)
3. In the hands of the parent having the higher total income, after allowing exemption under section 10(32).
4. Entirely in the hands of the father, irrespective of the source of income.

Answer: B — In the hands of the minor son, since the income arises from an activity involving his own skill and talent.

Working. Income earned from musical performances and original musical arrangements = ₹90,000. The income arises from the minor's own skill and talent. Accordingly, the exception under section 64(1A) applies. Amount to be clubbed with either parent = Nil. Amount assessed in the minor's hands = ₹90,000.

Explanation. Section 64(1A) generally provides for clubbing a minor child's income with the income of the prescribed parent. However, income derived from manual work or an activity involving the minor's own skill, talent, specialised knowledge or experience is excluded from clubbing. Since the entire ₹90,000 arises from the son's independent musical skill and talent, it is taxable in his own hands. Option (c) overlooks this specific exception.

Where it goes wrong. Assuming that every type of income earned by a minor must be clubbed with a parent's income.

Authority. Chapter 4, Section 64(1A), exception for income from minor's skill or talent, study material pp. 4.13 and 4.21-4.22

Question 9 · 2 marks · Ch 7 - Value of Supply · medium

Scenario. Northstar Workspace Ltd., Ahmedabad, manufactures and sells office furniture. In January 2026, it sold a workstation set to an unrelated dealer for ₹5,00,000. It charged ₹12,000 for packing and ₹8,000 for freight, allowed a ₹20,000 invoice discount, and received a ₹25,000 private-association subsidy directly linked to the sale price. No other amount was charged or received. On 24 February 2026, Northstar removed taxable office tables by truck for delivery to a customer, but generated the tax invoice on 25 February. On 1 March 2026, it bought a passenger car with approved seating capacity of five persons, including the driver, for directors’ business visits. On 15 April 2026, it received IT support services invoiced at ₹2,00,000 plus GST of ₹36,000. It claimed ITC and paid ₹1,18,000 of the ₹2,36,000 invoice within 180 days; the balance remained unpaid. Northstar issued a financial credit note to a dealer for a post-sale discount not agreed before supply. There was no agreement with the ultimate customer or separately contracted promotional service. For another FY 2025-26 supply, it furnished its annual return on 20 September 2026 and issued a GST credit note for a price reduction on 5 October 2026; tax incidence had not been passed on.

Calculate the taxable value of the workstation supply made by Northstar under section 15. All amounts are in rupees; no rounding is required.

1. ₹5,25,000 (correct answer)
2. ₹5,45,000
3. ₹5,20,000
4. ₹5,00,000

Answer: A — ₹5,25,000

Working. Basic transaction value = ₹5,00,000 Add packing charges = ₹12,000 Add freight charges = ₹8,000 Less discount recorded in the invoice = ₹20,000 Add subsidy directly linked to price = ₹25,000 Taxable value = ₹5,00,000 + ₹12,000 + ₹8,000 - ₹20,000 + ₹25,000 = ₹5,25,000.

Explanation. Option a is correct. Section 15 includes packing and other amounts charged by the supplier in respect of the supply before delivery, and a subsidy directly linked to the price is included unless it is provided by the Central or a State Government. The invoice-recorded discount is deductible. Option d is tempting because it omits the private subsidy, although that subsidy is includible in the taxable value.

Where it goes wrong. Omitting the non-government subsidy or adding back a discount already recorded in the tax invoice.

Authority. CGST Act, 2017, section 15(1); CGST Act, 2017, section 15(2)(c); CGST Act, 2017, section 15(2)(e); CGST Act, 2017, section 15(3)(a)

Question 10 · 2 marks · Ch 7 - Value of Supply; Ch 8 - Input Tax Credit; Ch 10 - Tax Invoice, Credit and Debit Notes · easy

What is the correct GST treatment of the financial credit note issued by Northstar for the post-sale commercial discount?

1. Northstar cannot reduce its output tax liability, and the dealer is not required to reverse ITC. (correct answer)
2. Northstar can reduce its output tax liability, and the dealer must reverse proportionate ITC.
3. Northstar can reduce its output tax liability, but the dealer can retain the entire ITC.
4. The commercial discount is automatically consideration for a separate promotional service supplied by the dealer.

Answer: A — Northstar cannot reduce its output tax liability, and the dealer is not required to reverse ITC.

Explanation. Option a is correct. Because the post-sale discount was not established by an agreement at or before the supply, it does not qualify for deduction under section 15(3)(b). Consequently, Northstar cannot reduce its original transaction value or output tax. Circular No. 251/08/2025 GST clarifies that the recipient need not reverse ITC on such a financial or commercial credit note. Option b incorrectly applies the treatment applicable to qualifying tax credit notes.

Where it goes wrong. Assuming that every financial or commercial credit note automatically reduces the supplier's GST liability and requires ITC reversal by the recipient.

Authority. CGST Act, 2017, section 15(3)(b); CGST Act, 2017, section 16(1); Circular No. 251/08/2025 GST dated 12.09.2025

Question 11 · 2 marks · Ch 8 - Input Tax Credit · easy

Determine whether Northstar is eligible to claim ITC on the passenger car purchased on 1 March 2026.

1. ITC is available because the vehicle is used for business purposes.
2. ITC is blocked because the vehicle has an approved seating capacity of not more than 13 persons, including the driver, and none of the specified exceptions applies. (correct answer)
3. ITC is available because directors' business visits constitute transportation of passengers.
4. ITC is available provided the supplier has uploaded the invoice in GSTR-1.

Answer: B — ITC is blocked because the vehicle has an approved seating capacity of not more than 13 persons, including the driver, and none of the specified exceptions applies.

Explanation. Option b is correct. Section 17(5)(a) blocks ITC on a motor vehicle used for transporting persons where its approved seating capacity is not more than 13, including the driver. The specified exceptions include further supply of such vehicles, taxable transportation of passengers and imparting driving training. Directors' business visits do not fall within these exceptions. Option a incorrectly treats business use alone as sufficient for ITC eligibility.

Where it goes wrong. Assuming that ITC is available on every asset purchased and used in the course or furtherance of business.

Authority. CGST Act, 2017, section 17(5)(a)

Question 12 · 2 marks · Ch 10 - Tax Invoice, Credit and Debit Notes · medium

Considering the removal of the office tables on 24 February and the generation of the tax invoice on 25 February, which statement correctly applies section 31(1)?

1. The tax invoice is required only when the recipient makes payment for the goods.
2. The tax invoice must be issued only when the goods are delivered to the recipient.
3. The tax invoice should have been issued before or at the time of removal of the goods; the invoice dated 25 February was issued late. (correct answer)
4. The tax invoice may be issued within 30 days after delivery in every case involving goods.

Answer: C — The tax invoice should have been issued before or at the time of removal of the goods; the invoice dated 25 February was issued late.

Explanation. Option c is correct. Under section 31(1)(a), a registered person supplying taxable goods involving movement must issue the tax invoice before or at the time of removal of the goods for supply to the recipient. Northstar removed the goods on 24 February but generated the invoice on 25 February. Option b incorrectly substitutes the time of delivery to the recipient for the statutory removal-based requirement.

Where it goes wrong. Confusing the invoice timing for goods involving movement with the invoice timing applicable to other situations or services.

Authority. CGST Act, 2017, section 31(1)(a)

Question 13 · 2 marks · Ch 10 - Tax Invoice, Credit and Debit Notes · hard

Can Northstar reduce its output tax liability by declaring the credit note issued on 5 October 2026 in its return, considering the relevant annual return was already furnished?

1. Yes, because there is no time limit for declaring a credit note issued under section 34.
2. Yes, because the credit note was issued before 30 November 2026.
3. Yes, because the tax incidence was not passed on to another person, irrespective of the time limit.
4. No, because the relevant annual return was furnished on 20 September 2026, which is earlier than 30 November 2026. (correct answer)

Answer: D — No, because the relevant annual return was furnished on 20 September 2026, which is earlier than 30 November 2026.

Working. Date of furnishing relevant annual return = 20 September 2026. 30 November following the end of FY 2025-26 = 30 November 2026. Earlier of the two dates = 20 September 2026. Credit note issued = 5 October 2026. Since 5 October is after 20 September, Northstar cannot reduce its output tax liability by declaring this credit note.

Explanation. Option d is correct. Section 34(2) requires the details of a credit note to be declared no later than 30 November following the financial year of supply or the date of furnishing the relevant annual return, whichever is earlier. Northstar furnished its annual return on 20 September 2026. Therefore, the adjustment period had already ended before the credit note was issued on 5 October. Option b overlooks the earlier annual-return trigger.

Where it goes wrong. Applying only the 30 November deadline and overlooking the alternative earlier deadline linked to furnishing the annual return.

Authority. CGST Act, 2017, section 34(1); CGST Act, 2017, section 34(2)

Question 14 · 2 marks · Ch 8 - Input Tax Credit · hard

Ignoring interest, calculate the amount of ITC that Northstar is required to reverse or pay back because the invoice amount was not fully paid within 180 days.

1. ₹36,000
2. ₹27,000
3. ₹18,000 (correct answer)
4. ₹9,000

Answer: C — ₹18,000

Working. Taxable value of IT support services = ₹2,00,000. GST charged = ₹36,000. Total invoice amount = ₹2,36,000. Amount paid within 180 days = ₹1,18,000. Unpaid amount = ₹2,36,000 - ₹1,18,000 = ₹1,18,000. Proportion unpaid = ₹1,18,000 / ₹2,36,000 = 50%. ITC to be reversed = ₹36,000 × 50% = ₹18,000. Applicable interest under section 50 is additionally payable; it is excluded from the amount calculated above.

Explanation. Option c is correct. Rule 37 requires reversal or payment of ITC proportionate to the amount remaining unpaid where the value of supply along with tax is not paid within 180 days. Half the invoice total remains unpaid, so half the ₹36,000 credit must be reversed, along with applicable interest under section 50. Option a reverses the entire credit, ignoring the payment already made.

Where it goes wrong. Reversing the entire ITC instead of calculating the proportionate credit attributable to the unpaid amount.

Authority. CGST Act, 2017, section 16(2), second proviso; CGST Rules, 2017, rule 37(1); CGST Act, 2017, section 50

Question 15 · 2 marks · Ch 12 - E-Way Bill · medium

Scenario. On 27 October 2026, Kaveri Industrial Bearings dispatches one consignment of ordinary goods by road from Surat to Nagpur, a distance of 450 km. The consignment value is ₹8,40,000. The e-way bill is generated before movement begins. The goods are neither over-dimensional cargo nor part of a multimodal shipment involving transport by ship.

For how many days is the e-way bill valid from its generation date?

1. 2 days
2. 4 days
3. 5 days
4. 3 days (correct answer)

Answer: D — 3 days

Working. Distance = 450 km. Validity for the first 200 km = 1 day. Remaining distance = 450 - 200 = 250 km. Additional validity = 1 day for every 200 km or part thereof. 250 km constitutes two additional 200-km blocks or parts thereof. Total validity = 1 + 2 = 3 days.

Explanation. Option d is correct. For ordinary cargo, the first 200 km carries one day's validity. The remaining 250 km is more than 200 km, so the rule prescribing one additional day for every 200 km or part thereof adds two days. Total validity is three days. Option a incorrectly rounds the remaining distance down to one 200-km block and overlooks the additional part thereof.

Where it goes wrong. Ignoring the words 'or part thereof' while calculating additional validity for the remaining distance.

Authority. CGST Act, 2017, section 68; CGST Rules, 2017, rule 138(10)

Question 16 · 1 marks · Ch 13 - Payment of Tax · easy

Scenario. Cedar Retail Pvt. Ltd. has an eligible ITC balance of ₹1,00,000 in its electronic credit ledger. For the tax period, it has ₹70,000 of regular output tax and ₹15,000 of GST payable under reverse charge, with ₹15,000 available in its electronic cash ledger.

Which statement correctly explains how Cedar Retail must discharge its reverse-charge tax liability?

1. It may use either the electronic credit ledger or electronic cash ledger for reverse-charge tax at its discretion.
2. It must use the electronic cash ledger for reverse-charge tax; eligible ITC can be used towards regular output tax. (correct answer)
3. It must use the electronic credit ledger for reverse-charge tax and the electronic cash ledger for regular output tax.
4. It can use the electronic credit ledger for both regular output tax and reverse-charge tax.

Answer: B — It must use the electronic cash ledger for reverse-charge tax; eligible ITC can be used towards regular output tax.

Explanation. Option b is correct. Reverse-charge tax is excluded from output tax by section 2(82), and the electronic credit ledger may be used only to pay output tax under section 49(4). The electronic cash ledger can be used to pay tax and other amounts under section 49(3). Option d incorrectly treats reverse-charge tax as ordinary output tax that can be discharged using ITC.

Where it goes wrong. Treating reverse-charge liability as output tax eligible for payment through the electronic credit ledger.

Authority. CGST Act, 2017, section 2(82); CGST Act, 2017, section 49(3); CGST Act, 2017, section 49(4)