ITC Reversal Under GST Rules 42 and 43: Common Credit Guide

If your business makes both taxable and exempt supplies, you cannot claim full Input Tax Credit on common inputs. Rules 42 and 43 of the CGST Rules govern exactly how this reversal works.

WHY REVERSAL IS NEEDED
ITC is available only for inputs used in making taxable supplies. When the same inputs, input services, or capital goods serve both taxable and exempt supplies — called common credit — you must reverse the exempt portion.

RULE 42: INPUTS AND INPUT SERVICES
Separate your total ITC into three buckets: credit exclusively for taxable supplies (fully claimable), credit exclusively for exempt supplies (fully reversed), and common credit for both.

For the common credit portion, the reversal is:
ITC to reverse = Common Credit x (Exempt Turnover / Total Turnover)

This calculation is done provisionally every month based on that month s turnover figures. At the end of the financial year, you recompute the ratio using actual annual turnover figures and make the final adjustment.

RULE 43: CAPITAL GOODS
Rule 43 applies the same principle to capital goods using a useful-life-based approach. The total ITC on a capital good is spread over 60 months (5 years). Each month, take one-sixtieth of the total ITC as monthly common credit, then apply the exempt turnover ratio:

Monthly reversal = (Total ITC / 60) x (Exempt Turnover / Total Turnover)

If the capital good is supplied before 60 months, section 18(6) requires payment of the higher of proportionately reduced ITC or tax on transaction value.

REPORTING
All ITC reversals under Rules 42 and 43 must be reported in Table 4(B) of GSTR-3B. The annual reconciliation figures go into GSTR-9 (annual return).

PRACTICAL TIP
Maintain a separate tracker for common credit from Day 1. Many businesses get caught during audits because they claimed full ITC without splitting common credit. A monthly worksheet mapping each invoice to taxable-only, exempt-only, or common use saves significant pain at year-end.