ITC reversal under Rule 42 and 43: the formula, step by step

If you make both taxable and exempt supplies, the credit on inputs and services that serve both can't all be kept. Rule 42 splits it each month. Rule 43 does the same for capital goods.

Rule 42 in four steps

1. Take out what is clear. T is the month's credit. Remove T1 (non-business use), T2 (used only for exempt supplies) and T3 (blocked under section 17(5)). What is left is C1.
2. Take out credit used only for taxable supplies, including exports and SEZ supplies. That is T4. C2 = C1 − T4 is the common credit.
3. Reverse the exempt share. D1 = (E ÷ F) × C2, where E is exempt supplies in the month and F is total turnover in the State in the month.
4. Add 5% if common credit is also used for non-business purposes. D2 = 5% of C2. You keep C3 = C2 − (D1 + D2).

You reverse D1 + D2, separately for each tax head. It is reported in Table 4B of GSTR-3B, and the field isn't filled in for you.

A worked example

C2 = 20,500, exempt supplies 3,00,000 and total turnover 30,00,000. D1 = 10% × 20,500 = 2,050. D2 = 5% × 20,500 = 1,025. Reverse 3,075 and keep C3 = 17,425.

Rule 43: capital goods

Divide the credit on a common capital good by 60. That is Tm, the credit for one month of its five-year life. Each month, the reversal is (E ÷ F) × the total Tm of the goods still within five years.

Related rules

• Rule 37A requires credit to be reversed when the supplier reported the invoice but did not pay the tax.
• Rule 44 covers credit when a registration is cancelled or a business moves to the composition scheme.
• The year's figures are reconciled in the annual return, and interest can apply.

Sources agree on the formulas, but whether D2 applies in your case is a judgement. Ask your CA.