GST ITC Reversal — Rules 42 + 43 Common Credit Apportionment (FY 2025-26)

Why Rules 42 + 43 exist

Section 16 of the CGST Act 2017 allows broad ITC on inward supplies used in the course or furtherance of business. Section 17 narrows this in two ways:

• Section 17(1) + (2): ITC on goods + services used partly for business + partly for non-business purposes, and ITC used partly for taxable / zero-rated supplies + partly for exempt supplies, must be restricted to the taxable / business portion.
• Section 17(5): A closed enumeration of expense categories where ITC is fully blocked (covered separately in the blocked credits under Section 17(5) spoke).

Rules 42 + 43 of the CGST Rules operationalise Section 17(1) + (2). They prescribe the mathematical apportionment formula for the common credit — ITC on shared expenses (office rent, audit fees, a central machine) that cannot be attributed exclusively to either taxable or exempt supplies. The exempt-attributable share + a deemed non-business slice are reversed; the balance remains creditable.

Failing to apply Rules 42 + 43 — or applying them incorrectly — is one of the most common triggers for Section 73 / 74 ITC-recovery proceedings under departmental audit. For the broader ITC framework + eligibility conditions, see the ITC rules guide and the GSTR-3B summary return spoke.

When do Rules 42 + 43 trigger

The rules trigger automatically at the end of every tax period (monthly for regular taxpayers; quarterly for QRMP) if any of the following are true:

1. Mixed taxable + exempt outward supply portfolio — e.g., a manufacturer selling branded packaged rice (5% GST) and loose unbranded rice (nil-rated exempt).
2. Transactions in securities — a business holding investments + trading in equities or mutual funds (treated as exempt at 1% of sale value per Section 17(3) Explanation).
3. Sale of land or completed building — Schedule III transactions specifically included in the exempt-supply value for Rule 42 / 43.
4. Non-business use of assets — partial private use of office vehicle, employee personal use of office internet, etc.

If outward supplies are exclusively taxable (including zero-rated exports + supplies to SEZ), Rules 42 + 43 do not apply — the full common-credit pool remains eligible without apportionment.

Rule 42 — common credit on inputs + input services

Rule 42 governs operational ITC: raw materials, consumables, rent, utilities, professional fees, freight inwards. The calculation is monthly, runs in two steps (identify the common pool, then apportion it), and is performed before filing the month’s GSTR-3B.

Step 1 — isolate the common credit (C2)

Start with total ITC and subtract the buckets that should not enter the common pool:

• T (Total ITC) for the tax period
• T1 — ITC on inputs / services used exclusively for non-business purposes (reverse outright)
• T2 — ITC on inputs / services used exclusively for exempt supplies (reverse outright)
• T3 — ITC blocked under Section 17(5) — motor vehicles, food + catering, etc. (reverse outright)
• T4 — ITC on inputs / services used exclusively for taxable / zero-rated supplies (fully creditable; excluded from common pool)

C1 = T − (T1 + T2 + T3) — total ITC credited to the electronic credit ledger after removing the always-blocked portions.

C2 = C1 − T4 — the common credit pool that must be apportioned.

Step 2 — apportion the common credit (D1 + D2)

The common pool is split using the turnover ratio:

• E — value of exempt supplies in the tax period (including 1% of securities sale value + land + completed-building sales)
• F — total turnover in the State for the tax period

D1 (exempt-attributable reversal) = (E / F) × C2

D2 (deemed non-business reversal) = 5% × C2 — applies only when common inputs / services are also used for non-business purposes; otherwise D2 is zero.

C3 (eligible common credit) = C2 − (D1 + D2) — the portion of common credit that survives apportionment.

D1 + D2 must be reported as a reversal in the monthly GSTR-3B.

Worked example

Manufacturing entity for October 2025:

• Total turnover (F): ₹1,00,00,000
• Exempt turnover (E): ₹20,00,000
• Total ITC (T): ₹5,00,000
• T1 (director’s personal use): ₹10,000
• T2 (exempt-product raw material): ₹40,000
• T3 (employee catering, blocked): ₹20,000
• T4 (taxable-product raw material, exclusively): ₹3,00,000

Calculation:

Step	Formula	Value
C1	T − (T1 + T2 + T3) = 5,00,000 − 70,000	₹4,30,000
C2	C1 − T4 = 4,30,000 − 3,00,000	₹1,30,000
D1	(E/F) × C2 = (20L / 100L) × 1,30,000	₹26,000
D2	5% × C2 = 5% × 1,30,000	₹6,500
C3	C2 − (D1 + D2) = 1,30,000 − 32,500	₹97,500

The entity reverses ₹32,500 (D1 + D2) in the October 2025 GSTR-3B via Table 4(B)(1).

Rule 43 — common credit on capital goods

Rule 43 governs ITC on capital goods (assets capitalised in the books with useful life beyond the tax period). Because capital goods contribute over multiple years, the ITC is spread over a deemed 60-month (5-year) useful life rather than apportioned in a single period.

Like Rule 42, capital goods are first classified by exclusive use:

• Exclusively non-business or exclusively exempt → ITC fully blocked at acquisition (not entered into credit ledger).
• Exclusively taxable / zero-rated → ITC fully creditable at acquisition (no apportionment).
• Common use (taxable + exempt, or business + non-business) → ITC credited at acquisition + enters the common pool (Tc) for 60-month spread reversal.

The 60-month spread

• Tc — total ITC on all capital goods in the common pool at the start of the tax period
• Tm (monthly attribution) = Tc / 60 — the slice of the common-pool ITC attributable to the current month
• Te (monthly exempt reversal) = (E / F) × Tm — the exempt-attributable slice of the monthly attribution, using the current month’s turnover ratio

Te is reversed every month, for 60 months, with the turnover ratio recalculated each month.

Worked example

November 2025: entity acquires a packaging machine for ₹10,00,000 + 18% GST (₹1,80,000 ITC). The machine packages both taxable and exempt products (common use).

• November turnover: F = ₹50,00,000, E = ₹10,00,000

Calculation for November 2025:

Step	Formula	Value
Tc	Total common-pool ITC at acquisition	₹1,80,000
Tm	Tc / 60	₹3,000
Te	(E / F) × Tm = (10L / 50L) × 3,000	₹600

The entity reverses ₹600 in the November 2025 GSTR-3B via Table 4(B)(1). In December 2025, Te is recalculated using December’s E / F ratio; the recalculated Te is reversed. The process continues for the full 60-month spread.

Annual reconciliation under Rule 42(2) + Rule 43(2)

Monthly D1, D2, Te calculations use month-specific turnover ratios. Business mix fluctuates, so the law requires a mandatory annual true-up after FY-end:

• Recompute aggregate D1 + D2 (Rule 42) and aggregate Te (Rule 43) for the entire FY using full-year E and F.
• Compare against the sum of monthly reversals already booked.

Outcomes:

• Shortfall (annual calculation > monthly aggregate): the difference is added to output tax liability + 18% interest under Section 50(3) from utilisation date to reversal date.
• Excess (annual calculation < monthly aggregate): the excess is re-credited to the electronic credit ledger as ITC.

The reconciliation + adjustment must be done by the September GSTR-3B following FY-end, OR by the actual filing of the GSTR-9 annual return, whichever is earlier. Missing the deadline forfeits the right to reclaim excess reversal.

Section 50(3) interest mechanics

Section 50(3) imposes 18% per annum interest where excess ITC was utilised against output tax during the year and is later reversed via the annual true-up. The clock runs from the date of utilisation of the wrongly-claimed ITC to the date of reversal in the GSTR-3B following the true-up. If the excess ITC was credited but never utilised (sat in the credit ledger), no interest applies — the reversal alone is sufficient.

Where the reversal flows in GSTR-3B + GSTR-9

Table 4(B)(1) of GSTR-3B

Per CBIC Circular 170/02/2022-GST (effective FY 2022-23), Table 4 of GSTR-3B was restructured:

• Table 4(A): total ITC available (including ineligible amounts)
• Table 4(B)(1): “As per rules 38, 42 & 43 of CGST Rules and sub-section (5) of section 17” — all permanent reversals (Rule 42, Rule 43, Section 17(5), Rule 38 banking-company restriction)
• Table 4(B)(2): “Others” — reclaimable reversals (180-day non-payment under Section 16(2) proviso, etc.)
• Table 4(C): net ITC available = A − B
• Table 4(D)(1): ITC reclaimed in current period that was reversed under 4(B)(2) earlier
• Table 4(D)(2): ineligible under Section 16(4) + PoS restriction

D1, D2, and Te all flow into Table 4(B)(1).

GSTR-9 Table 7 for annual reconciliation

In the GSTR-9 annual return, the year’s total reversals are broken out:

• Table 7A — Rule 37 (180-day non-payment) reversals
• Table 7B — Rule 39 (ISD-related) reversals
• Table 7C + 7D — Rule 42 + Rule 43 reversals respectively
• Table 7E — Section 17(5) reversals
• Table 7F — reversals under TRAN-I + TRAN-II transitional credit

Adjustments arising from the annual true-up (where the FY-end recalculation differs from monthly aggregates) flow into Part V of the GSTR-9 of the next FY.

Recredit mechanism when exempt → taxable later

Capital assets sometimes shift use during the 60-month life. Rule 43 handles this in two scenarios:

Exclusively-exempt → common use

ITC originally blocked at acquisition. When the asset enters common use:

1. The original ITC amount is recognised.
2. Reduce by 5% per quarter (rounded to the nearest quarter) for each quarter the asset was used exclusively for exempt supplies before the use-change.
3. The residual ITC enters the common pool (Tc) for the remaining months of the 60-month useful life.
4. From that point onwards, the standard monthly Te reversal applies.

Common use → exclusively-taxable

The capital asset exits the common pool. Future-month Tm computations exclude its remaining ITC; the asset’s residual ITC is fully creditable for the balance of its 60-month life.

Common SME pitfalls

1. Failing to identify T4 properly — dumping all ITC into C2 without isolating ITC that is exclusively for taxable supplies. This inflates the common pool, increases D1 unnecessarily, and over-reverses ITC.
2. Exempt-turnover definition errors — forgetting to include the 1% of securities sale value, forgetting interest income (exempt under most heads), forgetting land + completed-building sales. Conversely, over-including high-sea sales + customs-bond transfers (which are excluded per CBIC clarification).
3. Forgetting the 5% D2 deemed non-business reversal — even when there’s a genuine non-business overlap (e.g., common office internet), entities calculate only D1 (exempt-turnover-based) and skip D2. The 5% deemed reversal is non-optional where common inputs have any non-business use.
4. Skipping the annual true-up — sticking with monthly reversals through the year and never recomputing on full-year turnover. The September-following-FY-end deadline is hard; missing it forfeits any excess-reversal reclaim and exposes the shortfall to 18% interest on assessment.
5. Treating capital goods under Rule 42 — applying the monthly turnover ratio to the full capital-goods ITC in the month of acquisition instead of spreading over the 60-month useful life per Rule 43. The result is massive over-reversal in the acquisition month and under-reversal across the rest of the asset’s life.
6. Ignoring the recredit on use-change — when an exempt-only asset shifts to common use, entities often forget to re-recognise the ITC + add the asset to Tc. This permanently loses the credit even though the law permits its recovery.

For the broader ITC framework + 180-day reversal mechanics, see the ITC rules guide. For where blocked-credit reversals interact with Rule 42 / 43, see the blocked credits Section 17(5) spoke. For end-to-end monthly Rule 42 / 43 computation + annual reconciliation + GSTR-9 preparation, see the GST Return Filing service and the GSTR-9 annual return service.