1.A Show Cause Notice bearing reference no. XXXXXXXX dated XX September 2023 was issued to the Noticee by the Ld. Sales Tax Officer Class XXXX proposing GST demand of Rs. XXXX/- (CGST and SGST each) along with interest amounting to Rs. XXXX/- (CGST and SGST each) under section 50 of the CGST Act, 2017 (“the Act”) and penalty as applicable under Section 73 of the Act on the sole allegation that while scrutinizing the annual return and financial statements filed by the Noticee for the period 20XX-20XX, it has been alleged by the Ld. Proper Officer that The Noticee has income classified as ‘Interest Income‘ which is exempt from tax. However, the Noticee failed to reverse the Input Tax Credit (ITC) as required under Rule 42 in relation to this exempt income.

2.In response to the allegation as set out in the SCN dated XX September 2023, the Noticee submits that the findings of the concerned authority are not in line with the legal matrix and factual positioning of the case.

NOTICEE’S SUBMISSIONS

At the outset, the Noticee submits that the allegations made in SCN dated XX-September-2023 is incorrect and unsustainable based on the following grounds and submissions which are independent and without prejudice to each other.

1. That Interest Income is considered as an Exempt Income and not liable to any tax under GST.

2. As per section 17(2) of CGST Act, credit of Input Tax is restricted to taxable supplies only and any proportional ITC attributable to Exempt supplies shall not be allowed. The relevant extract of Section 17(2) of the CGST Act 2017 is as follows-

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

3. Further as per clause (b) of Explanation 1 of Rule 43 interest income is excluded from the value of exempt supply for ITC reversal calculation. The relevant extract are as follows:

Explanation 1: For the purposes of Rule 42 and this rule, it is hereby clarified that the aggregate value of exempt supplies shall exclude: –

(b) the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances;

The above mentioned clause (b) has been inserted via Notification No. 55/2017- Central Tax dated 15 November 2017.

4. On considering the above explanation as per Rule 43, we can conclude that though Interest Income is an exempt income as per the provisions of CGST Act, 2017 but is out of the scope of exempt income from the point of view of Rule 42 that talks about the manner of reversal of ITC on Exempt supplies.

5. Hence, summing up the explanation, the noticee would like to put forward that ITC availed on Interest Income shall not be reversed as Interest income is not considered as exempt income for the purposes of Reversal under Rule 42.

Conclusion

6. Accordingly, demand amounting to Rs. Rs. XXXX/-/- proposed vide Notice dated XX September 2023 upon the Noticee on this issue should be set aside as the same is not tenable in eyes of law.

7. Therefore, it is kindly submitted before the office of your goodself to drop the proceedings upon the Noticee.