ITC Reversal: Rules 42 and 43

Reversal formulas and reconciliation timelines can change. This article is for general information and does not constitute tax advice.

When This Applies

Rules 42 and 43 come into play only where there’s genuine common, mixed-use credit, inputs used partly for taxable supplies and partly for exempt supplies or non-business purposes. A business with purely taxable supplies has nothing common to apportion. Even a single exempt supply technically creates the taxable-and-exempt split that brings common credit into this framework.

Rule 42: Inputs and Input Services

Common credit (C2) is what’s left after subtracting credit exclusively attributable to taxable and exempt supplies from total ITC. From C2, two amounts get reversed: D1 (the ratio of exempt turnover to total turnover, applied to C2) and D2 (a flat 5% of C2 for deemed non-business use, regardless of actual evidence). This reversal happens monthly on a provisional basis, with a full annual reconciliation due by the GSTR-3B for September following the financial year end, or the annual return filing date, whichever comes first.

Rule 43: Capital Goods

Capital goods get a different mechanism, spread across a deemed useful life of 60 months from the invoice date. The monthly credit portion for a capital good is its total ITC divided by 60; the reversal for that month is that portion multiplied by the exempt turnover ratio. A capital good used exclusively for taxable or exclusively for exempt supplies skips this apportionment entirely.

Other Triggers, Briefly

The 180-day payment rule and depreciation restriction are covered under the ITC Rules article; blocked credit categories and goods lost, destroyed, or gifted are covered under Blocked Credits.