For many businesses, one of the trickiest parts of GST compliance is handling Input Tax Credit (ITC) reversal under Rule 42 & 43 of the CGST Rules. The rules are designed to ensure that businesses only claim ITC proportionate to their taxable supplies. But in practice, confusion around calculations often leads to errors, interest, or even GST notices.

Here’s a simple, step-by-step breakdown.

ITC Reversal under Rule 42 & 43: A Step-by-Step Breakdown

Why ITC Reversal Matters

ITC is one of the biggest benefits under GST, but it comes with conditions. When businesses deal in both taxable and exempt supplies, they cannot avail 100% of the ITC on common inputs, input services, or capital goods.

This is where Rule 42 and Rule 43 come in: they prescribe the method to apportion ITC and reverse the ineligible portion.

The Most Common Error 

•  Ignoring exempt supplies in proportion calculation.
  
•  Always factor in exempt turnover while apportioning ITC between taxable and exempt supplies.
  

Failure to do so can lead to inflated ITC claims, which may later attract interest and penalties.

Rule 42 vs. Rule 43

• Rule 42: Applies to inputs and input services. It lays down the monthly calculation method for identifying the portion of ITC attributable to exempt supplies.
  
• Rule 43: Applies to capital goods. Here, ITC needs to be spread over 60 months, with proportionate reversal for exempt usage.
  

Think of Rule 42 as your monthly ITC workout and Rule 43 as your long-term ITC diet plan.

Formula Highlights

The crux of ITC reversal lies in the formula:

Eligible ITC = Total ITC – Ineligible ITC – Reversal proportion

• Total ITC (T): ITC on all inward supplies.
  
• Ineligible ITC (T1, T2): Blocked credits (e.g., personal use, motor vehicles, etc.).
  
• Reversal proportion (D1, D2): ITC attributable to exempt supplies and non-business purposes.
  

👉 Best Practice: Maintain monthly workings with detailed formulas and documentation. This creates a solid audit trail and avoids disputes later.

Why Accuracy is Critical

Getting ITC reversal wrong can have costly consequences:

• Interest liability: 18% on excess ITC claimed.
  
• Penalties: For inaccurate returns or suppression.
  
• GST notices: From mismatches in GSTR-3B and annual return scrutiny.
  

Mastering these calculations is not just about compliance—it’s about safeguarding your working capital.

Pro Tip for Businesses

• Build an Excel tracker or ERP module for Rule 42 & 43 working.
  
• Reconcile monthly, not just at year-end.
  
• Keep calculations ready for audit or departmental queries.
  

Final Word

Mastering ITC reversal under Rule 42 & 43 means fewer compliance headaches and stronger GST credibility. By documenting calculations, factoring in exempt turnover, and applying the right formula consistently, businesses can avoid unnecessary interest, penalties, and notices.

👉 Want a detailed working template? Get in touch with Pitchers Global today!