ITC Reversal Under GST — Rule 42, 43 & 180 Days

Rule 43 governs reversal of ITC on capital goods used partly for exempt supplies or non-business purposes. Unlike Rule 42, the ITC on a capital good is spread over 60 months (5 years) — 1/60th per month — and the portion attributable to exempt use is reversed each month based on the exempt-to-total turnover ratio. If a capital good is used exclusively for taxable supplies, no reversal is required. Reversal continues even after the asset is fully depreciated.

The monthly reversal of common credit is D1 = (C2 × E) ÷ F, where C2 is the common ITC, E is the aggregate value of exempt supplies during the period, and F is the total turnover in the state during the period. A separate reversal (D2) of 5% of common ITC is made for non-business use. The annual true-up recomputes these using full-year figures.

The final annual calculation must be completed before the due date of the September return of the following financial year — effectively by 30 November. If the annual reversal is more than the total monthly (provisional) reversals, the shortfall is added to output tax with 18% interest. If it is less, the excess reversal can be reclaimed as ITC in that return.

Under the second proviso to Section 16(2), if you fail to pay the supplier the invoice value plus tax within 180 days from the invoice date, the ITC claimed must be reversed and added to your output tax liability with interest at 18% per annum. This is reported in Table 4(B)(2) of GSTR-3B. Once you actually pay the supplier, you can re-avail the ITC in the return for the period of payment, with no time limit on re-availment.

No. The 180-day payment condition does not apply to supplies on which tax is payable under the reverse charge mechanism, because there the recipient itself deposits the tax. It also does not apply to deemed supplies made without consideration. For all normal forward-charge purchases, the 180-day rule applies.

Yes. If you reverse ITC because the supplier was unpaid for 180 days and later make the payment, you can re-avail the same ITC in the GSTR-3B for the tax period in which you pay. The re-availment is not subject to the normal Section 16(4) time limit, and no fresh interest arises on the re-availed credit.

ITC is retained in proportion to the value actually paid within 180 days; the credit relating to the unpaid balance must be reversed with interest. When the balance is later paid, the corresponding ITC can be re-availed. So partial payment leads to a proportionate reversal, not a full one.

Section 17(5) lists supplies on which ITC is permanently blocked. These include motor vehicles seating up to 13 persons (unless used for resale, passenger transport for hire, or driving schools); food and beverages, health and beauty services; club and fitness memberships; works-contract services and construction of immovable property (except plant and machinery); goods or services for personal consumption; and goods lost, stolen, destroyed, written off or given as gifts or free samples. These are ineligible credits, not reversals.

ITC on a motor vehicle for transport of persons with seating capacity up to 13 (including the driver) is generally blocked under Section 17(5)(a). It is allowed only if the vehicle is used for further supply of vehicles, for transportation of passengers for hire, or for imparting driving training. A car bought for a director's or employee's personal use has blocked ITC.

No. Section 17(5)(h) blocks ITC on goods that are lost, stolen, destroyed, written off or disposed of as gifts or free samples. If credit was already taken on such goods, it must be reversed. This commonly affects damaged stock, expired inventory and promotional give-aways.

ITC reversal is reported in Table 4(B) of GSTR-3B. Sub-head 4(B)(1) covers reversals under Rule 42 and 43 (exempt supplies and capital goods); sub-head 4(B)(2) covers other reversals such as the 180-day non-payment reversal, reversal on cancellation of registration, and voluntary reversals. Section 17(5) blocked credits are shown separately as ineligible ITC in Table 4(D)(1). Net ITC available = 4(A) minus 4(B).

Interest at 18% per annum under Section 50 applies on ITC that is reversed late or under-reversed — whether due to a 180-day payment default or a Rule 42/43 shortfall found at the annual true-up. Interest runs from the date the ITC was wrongly retained or availed until it is reversed and paid.

Reversal (Table 4(B)) means credit you were eligible to take but must give back due to exempt use, non-payment or later events. Ineligible ITC (Table 4(D)(1)) means credit you were never entitled to — the Section 17(5) blocked list. Reporting them in the wrong table distorts your net credit and can trigger a discrepancy notice.

Yes. Under Section 18(4) read with Rule 44, on cancellation of registration you must reverse the ITC on inputs held in stock, inputs in semi-finished/finished goods, and on capital goods, in the final return GSTR-10. For capital goods the reversal is the higher of the ITC reduced by 5% per quarter of use or the tax on the transaction value.

No. The GST 2.0 rationalisation effective 22 September 2025 restructured goods and services rates into a two-slab system (5% and 18% with a 40% demerit rate) but did not change the ITC reversal framework. Rule 42, Rule 43, the 180-day rule under Section 16(2) and the Section 17(5) blocked-credit list continue to apply as before.