Reversing Input Tax Credit on Exempt By-Products Under GST Rules
Oil extraction units producing taxable oil and exempt de-oiled cake by-products cannot claim full input tax credit on raw material purchases.
- Ruling
- Order No. 06 dated 25.05.2018
- Dated
- 25 May 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- Company asked if full ITC is allowed on raw materials for oil extraction.
- Tax authority ruled de-oiled cake and rice bran are exempt by-products.
- Full input tax credit is not allowed on common raw material purchases.
- Manufacturers must proportionately reverse ITC for tax-free by-products under Section 17(2).
In short
Indo Prosoya Foods Pvt. Ltd. (order UP_AAR_06) extracted oil from Mahua cake and rice bran. The main product, solvent-extracted oil, attracts Goods and Services Tax (GST). However, the process also produces de-oiled cake and rice bran, which are exempt from GST as animal feed ingredients. The company argued these by-products were just waste, asking if it could claim 100% input tax credit on raw material purchases.
What has changed
How it worked before
Before this ruling, many oil millers and extraction units assumed that secondary items like de-oiled cake were un-taxed process waste. Based on this assumption, businesses routinely claimed full input tax credit on all raw material purchases without reducing their tax credit claims for exempt outputs.
What has changed
The Uttar Pradesh Authority for Advance Ruling decided that de-oiled cake and rice bran are valuable exempt by-products, not simple waste. Because common raw materials produce both taxable oil and exempt feed ingredients, the business cannot claim full GST input tax credit. Under Section 17(2) of the CGST Act, 2017, the manufacturer must calculate and proportionately reverse the input tax credit matching the exempt by-products.
Who this affects
Solvent extraction plants, oil mills, and agricultural processing businesses that produce taxable primary goods alongside tax-exempt by-products like de-oiled cakes, bran, or husk.
An example
Standard Extraction Co. processes seeds to produce taxable oil and exempt de-oiled cake used for cattle feed. The business pays GST on raw seed purchases and wants to claim full input tax credit. Based on this ruling, the tax department would require Standard Extraction Co. to split its credit based on turnover. The company must reverse the portion of input tax credit that corresponds to the sales value of the exempt de-oiled cake.
What you should do
Check whether your manufacturing process creates exempt by-products alongside taxable goods. If it does, calculate your monthly input tax credit reversal using the formula under GST rules. Keep in mind that an advance ruling applies legally only to the business that applied for it. If you have the same process, consult a tax professional or apply for your own advance ruling before changing your tax filings.
If you do nothing
If you continue claiming full input tax credit while selling exempt by-products, tax officers may highlight this during an audit. You can be asked to pay back the excess input tax credit claimed, along with interest at 18% per year. Tax authorities may also levy penalties for incorrect tax credit utilization under GST law.
The terms explained
- input tax credit
- The GST you pay on business purchases that you can deduct from the GST you collect on your sales.
- by-product
- A secondary item produced automatically while manufacturing your main product.
- proportionate reversal
- Reducing your tax credit claim proportionally because a portion of your final output is sold without charging tax.
The ruling in detail
Authority for Advance Ruling
M/s. Indo Prosoya Foods (P) Ltd.
Order No. 06 dated 25.05.2018 · Uttar Pradesh
Questions before the authority
- Whether Mahua De-oiled cake/ De-oiled Rice Bran being used as an ingredient of Cattle Feed, Poultry Feed and other animal feeds and is 'Waste generated' during the Solvent Extraction process?
- Whether the applicant is eligible to get entire tax input credit of GST paid on purchase of Mahua Oil Cake/Rice Bran Oil cake used in the manufacture of solvent extracted oil?
Facts
The applicant purchases Mahua oil cake and Rice Bran to extract oil using a solvent extraction process. The primary product is solvent-extracted oil (taxable under HSN 1515), while Mahua De-oiled cake and De-oiled Rice Bran emerge as by-products. These by-products are supplied/used as ingredients in exempt animal, cattle, and poultry feed. The applicant sought clarity on the nature of these by-products and its entitlement to claim full input tax credit on raw material purchases.
Ruling
| Question | What the authority ruled |
|---|---|
| Classification of Mahua De-oiled cake / De-oiled Rice Bran as waste | By-product occurred during the Solvent Extraction process, used as animal feed ingredient Classified under HSN 2308/2309 and exempt from tax |
| Eligibility for full input tax credit on raw material purchases | Partially allowed; proportional credit reversal required ITC reversal mandated under Chapter V of CGST Rules, 2017 for inputs used in exempt supplies |
The Authority ruled that Mahua De-oiled cake and De-oiled Rice Bran are **by-products** derived during solvent extraction, used in exempt animal feed. Consequently, full input tax credit on raw materials is not permitted, and the applicant must **proportionately reverse ITC** attributable to exempt supplies under Section 17(2) of the CGST Act, 2017.
Reasoning
The Authority observed that de-oiled mahua cake and de-oiled rice bran fall under HSN 2308 and 2309, which are exempted from GST under Notification No. 2/2017-Central Tax (Rate) as amended by Notification No. 7/2018-Central Tax (Rate). Because the applicant manufactures both taxable goods (solvent-extracted oil) and exempt goods (de-oiled cakes/bran) from common inputs, Section 17(2) of the CGST Act, 2017 applies. This section restricts credit to the portion attributable to taxable and zero-rated supplies. Accordingly, ITC must be proportionately reversed per the procedure under Chapter V of the CGST Rules, 2017.
Provisions relied on
- Section 17(2) of the CGST Act, 2017
- Chapter V of the CGST Rules, 2017
- Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017
- Notification No. 7/2018-Central Tax (Rate) dated 25.01.2018
- HSN 1515
- HSN 2308
- HSN 2309
For the practitioner
This ruling establishes that manufacturers whose extraction process yields both taxable main products and exempt by-products (such as animal feed ingredients) **cannot claim 100% ITC** on common inputs. Businesses must perform **proportionate ITC reversal** under Section 17(2) of the CGST Act for inputs attributed to exempt by-products.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/up_aar_06_25.05.2018_ipfpl.pdf
Legibility of the scan, as read: high.
Prepared 18-10-2026.
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