GST Input Tax Credit Reversal on Exempt Solvent Extraction By-Products
Solvent extractors must reverse part of their GST input tax credit because de-oiled cakes sold as animal feed are tax-exempt.
- Ruling
- Order No. 07 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
- A manufacturer asked if full input tax credit applies to raw oil cakes.
- The authority ruled that de-oiled cakes are exempt by-products, not waste.
- Full GST input tax credit cannot be claimed on raw materials yielding exempt goods.
- Businesses must reverse input tax credit proportionately under Section 17(2).
In short
A solvent extraction unit manufactured taxable edible oil from raw oil cake and rice bran. The extraction process generated de-oiled cake and de-oiled rice bran, which were sold as ingredients for animal feed. The company argued that these outputs were waste and sought to claim full GST input tax credit on the raw materials purchased.
What has changed
How it worked before
Solvent extraction businesses often assumed de-oiled cakes were non-taxable waste, allowing them to claim full input tax credit on all raw material purchases.
What has changed
In order UP_AAR_07 dated 25.05.2018, the Uttar Pradesh Authority for Advance Ruling decided that de-oiled cake and bran are commercial by-products exempt under GST notifications, not waste. Because common inputs produce both taxable edible oil and exempt animal feed inputs, full input tax credit is disallowed. Under Section 17(2) of the CGST Act, 2017, the manufacturer must reverse the portion of input tax credit related to the exempt sales.
Who this affects
Solvent extraction units and edible oil manufacturers that produce de-oiled cake or bran used in animal feed.
An example
A solvent plant in Uttar Pradesh purchases raw rice bran to manufacture edible oil, paying 5% GST on the raw material. The plant sells edible oil with GST and sells de-oiled rice bran tax-free to poultry feed makers. Under this ruling's logic, the plant cannot retain 100% of the input tax credit paid on the raw rice bran. It must calculate the sales value of the exempt de-oiled bran and reverse a matching percentage of the input tax credit in its GSTR-3B.
What you should do
Review your manufacturing process to identify exempt by-products like de-oiled rice bran or Mahua cake. If your inputs produce both taxable and exempt goods, apply the proportional credit reversal rules in Chapter V of the CGST Rules, 2017. Note that an advance ruling binds only the company that asked and its tax officers, so other businesses should consult a professional rather than treat this as a general tax law.
If you do nothing
If you claim full input tax credit while selling exempt by-products, tax officers can audit your GSTR-3B filings and disallow the unreversed credit. You will be required to pay back the excess input tax credit along with interest under Section 50. Tax authorities may also levy penalties for taking ineligible credit.
The terms explained
- input tax credit
- The GST a business pays when buying raw materials or services, which it can subtract from the GST it collects on its sales.
- exempt supply
- Goods or services that attract zero GST rate and are sold without charging tax to the buyer.
- proportionate ITC reversal
- The requirement to pay back a portion of tax credits when inputs are used to make both taxable and tax-free goods.
The ruling in detail
Authority for Advance Ruling
M/s. Khanelwal Extractions Ltd.
Order No. 07 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 manufacture solvent-extracted edible oil, which is a taxable supply under HSN 1515. The extraction process generates Mahua de-oiled cake and de-oiled rice bran, which are sold as ingredients for cattle, poultry, and fish feed. The applicant sought clarity on whether these outputs are considered waste and whether full Input Tax Credit (ITC) can be claimed on the raw materials used.
Ruling
| Question | What the authority ruled |
|---|---|
| Classification of de-oiled cake/rice bran as waste | It is a **by-product occurred during the Solvent Extraction process** used as feed ingredient. Classified as an exempt feed ingredient rather than unclassified waste. |
| Eligibility for full ITC on raw materials | ITC is **partially allowed** and requires proportional reversal. Reversal is mandated under Chapter V of CGST Rules, 2017 for inputs used in exempt supplies. |
The Authority held that de-oiled Mahua cake and de-oiled rice bran are by-products utilized in animal feeds rather than non-taxable waste. Because these by-products are exempt goods, the applicant is **not eligible for full ITC** on the raw oil cake and rice bran purchased. The applicant must perform **proportionate ITC reversal** under Section 17(2) of the CGST Act, 2017 read with Chapter V of the CGST Rules.
Reasoning
The AAR observed that de-oiled rice bran and de-oiled cake are specifically exempted under Notification No. 2/2017-Central Tax (Rate) as amended by Notification No. 7/2018-Central Tax (Rate). Under **Section 17(2) of the CGST Act, 2017**, when common input goods are used for effecting both taxable supplies (solvent extracted oil) and exempt supplies (de-oiled feed ingredients), input credit cannot be taken in full. The applicant must restrict credit strictly to the portion attributable to taxable supplies and reverse the remaining credit proportional to the exempt supplies as prescribed in Chapter V of the CGST Rules, 2017.
Provisions relied on
- Section 17(2) of CGST Act, 2017
- Chapter V of 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
For the practitioner
This ruling establishes that exempt by-products arising out of a manufacturing process trigger **proportionate ITC reversal** under Section 17(2). Solvent extractors cannot claim full ITC on raw oil cakes or rice bran if the resulting de-oiled cake or bran is exempt from GST. It reinforces that common inputs generating both taxable main products and exempt by-products require strict compliance with Rule 42/43 ITC reversal mechanics.
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_07_25.05.2018_kel.pdf
Legibility of the scan, as read: high.
Prepared 18-10-2026.
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