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ITC Reversal Rules Under GST — Rule 42, Rule 43 & Section 17(5) Explained

Q: What is ITC reversal under Rule 42 of CGST Rules?

Rule 42 deals with reversal of input tax credit on inputs and input services used partly for exempt supplies or non-business purposes. If a registered person uses inputs or input services for both taxable and exempt supplies, the ITC attributable to exempt supplies must be reversed each month. The formula is: Reversal = (Common ITC) × (Exempt Turnover / Total Turnover). A provisional reversal is made monthly and a final annual reconciliation is done in the September return of the following year. Any excess provisional reversal can be reclaimed, and any short reversal must be paid with interest at 18%.

Q: What happens if a supplier is not paid within 180 days under GST?

Under Section 16(2) of the CGST Act, if the recipient fails to pay the supplier within 180 days from the date of invoice, the ITC originally claimed must be reversed along with interest at 18% per annum. This reversal is reported in Table 4(B)(2) of GSTR-3B. Once the payment is actually made to the supplier, the ITC can be re-claimed in the return for the period in which the payment is made. The 180-day rule does not apply to supplies on which tax is payable under reverse charge mechanism (RCM).

Q: What are blocked credits under Section 17(5) of the CGST Act?

Section 17(5) specifies certain supplies on which ITC is permanently blocked (cannot be claimed at all). These include: motor vehicles for transportation of persons (with up to 13 seats, unless used for specific purposes like further supply, transportation of passengers for hire, or driving schools); food and beverages, health services, beauty treatment; club memberships; works contract services for immovable property (except input service for further supply of works contract); goods or services for personal consumption; and goods lost, stolen, destroyed, or given as gifts. These are not reversals — ITC on these supplies is simply not available.

Q: How is ITC reversal reported in GSTR-3B?

ITC reversal is reported in Table 4(B) of GSTR-3B. There are two sub-heads: 4(B)(1) for ITC reversed as per Rule 42 and 43 (reversals due to exempt supplies and capital goods), and 4(B)(2) for "other reversals" including the 180-day non-payment reversal, reversal on cancellation of registration, and any voluntary reversals. The net ITC available for utilisation is = Total ITC claimed in 4(A) minus reversals in 4(B) minus ineligible ITC in 4(D). Accurate reporting is critical as discrepancies can trigger GST notices.

Q: What is Rule 43 ITC reversal for capital goods?

Rule 43 governs reversal of ITC on capital goods that are used partly for exempt supplies or non-business purposes. Unlike Rule 42 (which is a lump-sum monthly reversal), Rule 43 requires the ITC on capital goods to be spread over 60 months (5 years) — i.e., 1/60th of the total ITC per month. The monthly amount attributable to exempt use is then reversed based on the exempt-to-total turnover ratio. If capital goods are exclusively used for taxable supplies, no reversal is needed. Reversal must continue even if the capital good is fully depreciated.

Last updated: 3 June 2026

ITC (Input Tax Credit) reversal under GST is mandatory when goods or services are used for exempt supplies, personal use, or capital goods used partly for exempt purposes. The key rules are Rule 42 (inputs/input services), Rule 43 (capital goods), the 180-day non-payment rule (Section 16(2)), and permanently blocked credits under Section 17(5). Reversals are reported in Table 4(B) of GSTR-3B.

18%

Interest rate applicable when ITC reversal is not made on time — whether due to 180-day payment default or Rule 42/43 underpayment after annual reconciliation.

Rule 42 vs Rule 43 — Key Differences

Parameter	Rule 42	Rule 43
Applies to	Inputs & Input Services	Capital Goods
Trigger for reversal	Used for exempt supplies or non-business purpose	Used partly for exempt supplies or non-business
Formula	Common ITC × (Exempt Turnover / Total Turnover)	(ITC / 60) × (Exempt Turnover / Total Turnover) per month
Periodicity	Monthly (provisional) + Annual true-up	Monthly (over 60 months)
Annual reconciliation	In September GSTR-3B of following FY	Yes — annual reversal on common capital goods
GSTR-3B reporting	Table 4(B)(1)	Table 4(B)(1)

Rule 42 ITC Reversal — Detailed Explanation

Under Rule 42, the total ITC on common inputs and input services is first segregated into three categories: (1) ITC exclusively used for taxable supplies — fully available; (2) ITC exclusively for exempt supplies or non-business — fully reversed; (3) Common ITC (used for both) — partially reversed each month.

Monthly reversal formula: D1 = (C2 × E) / F where C2 = common ITC, E = exempt turnover, F = total turnover. An annual calculation is done in September — if total annual reversal < cumulative monthly reversals, excess can be reclaimed. If less, the shortfall must be paid with interest at 18%.

180-Day Payment Rule — Section 16(2)

Scenario	ITC Treatment	Interest
Supplier paid within 180 days of invoice date	ITC retained — no reversal needed	Nil
Supplier NOT paid within 180 days	ITC must be reversed + added to output tax	18% per annum from date of ITC claim
Payment made to supplier after reversal	ITC can be re-availed in period of payment	No fresh interest on re-availed ITC
RCM supplies (reverse charge)	180-day rule NOT applicable	Nil
Part payment within 180 days	ITC proportionate to part paid is retained; balance reversed	On reversed portion only

Blocked Credits Under Section 17(5) — Permanently Ineligible ITC

Section 17(5) blocks ITC on specific categories entirely — these are not "reversals" but outright ineligibility. Claiming ITC on these can result in demand notices and penalties.

Blocked Category	Exception (ITC allowed)
Motor vehicles for <= 13 passengers	Further supply of vehicles; passenger transport service; driving schools
Food, beverages, beauty treatment, health services	If the business itself makes outward taxable supply of such services
Club memberships, fitness centres	No exception
Works contract on immovable property	ITC allowed if input service for further supply of works contract
Construction of immovable property	No ITC (even if for business — plant & machinery is an exception)
Personal consumption goods	No exception
Goods lost, stolen, destroyed, gifts, free samples	No exception

Common ITC Reversal Scenarios

Scenario	Rule / Section	Action Required	Interest?
Goods sold as exempt (e.g., agricultural produce)	Rule 42	Monthly proportionate reversal	If under-reversed at year-end
Capital machinery used for exempt goods	Rule 43	1/60th per month × exempt ratio	If under-reversed
Invoice unpaid for 6 months	Section 16(2)	Reverse ITC + interest from claim date	Yes — 18% p.a.
ITC claimed on food catering for employees	Section 17(5)	ITC never claimable — reverse if wrongly claimed	Yes + penalty
Car purchased for MD's personal use	Section 17(5)	ITC blocked entirely	Yes + penalty
ITC claimed, then registration cancelled	Section 18(4)	Reverse ITC on closing stock	Higher of ITC or 5% per quarter on market value

How to Report ITC Reversal in GSTR-3B

GSTR-3B Table 4 is used for ITC reporting. The structure is:

Table 4 Sub-head	What to Report
4(A) — ITC Available	Total ITC from GSTR-2B (auto-populated)
4(B)(1) — Rule 42/43 reversals	Reversal due to exempt supplies & capital goods
4(B)(2) — Other reversals	180-day non-payment, cancellation, voluntary reversals
4(D)(1) — Ineligible ITC (blocked)	Section 17(5) blocked credits — report here, not in 4(B)
Net ITC	4(A) minus 4(B) minus 4(D) = ITC available for utilisation

Frequently Asked Questions

What is ITC reversal under Rule 42 of CGST Rules?

Rule 42 deals with reversal of input tax credit on inputs and input services used partly for exempt supplies or non-business purposes. If a registered person uses inputs or input services for both taxable and exempt supplies, the ITC attributable to exempt supplies must be reversed each month. The formula is: Reversal = (Common ITC) × (Exempt Turnover / Total Turnover). A provisional reversal is made monthly and a final annual reconciliation is done in the September return of the following year. Any excess provisional reversal can be reclaimed, and any short reversal must be paid with interest at 18%.

What happens if a supplier is not paid within 180 days under GST?

Under Section 16(2) of the CGST Act, if the recipient fails to pay the supplier within 180 days from the date of invoice, the ITC originally claimed must be reversed along with interest at 18% per annum. This reversal is reported in Table 4(B)(2) of GSTR-3B. Once the payment is actually made to the supplier, the ITC can be re-claimed in the return for the period in which the payment is made. The 180-day rule does not apply to supplies on which tax is payable under reverse charge mechanism (RCM).

What are blocked credits under Section 17(5) of the CGST Act?

Section 17(5) specifies certain supplies on which ITC is permanently blocked (cannot be claimed at all). These include: motor vehicles for transportation of persons (with up to 13 seats, unless used for specific purposes like further supply, transportation of passengers for hire, or driving schools); food and beverages, health services, beauty treatment; club memberships; works contract services for immovable property (except input service for further supply of works contract); goods or services for personal consumption; and goods lost, stolen, destroyed, or given as gifts. These are not reversals — ITC on these supplies is simply not available.

How is ITC reversal reported in GSTR-3B?

ITC reversal is reported in Table 4(B) of GSTR-3B. There are two sub-heads: 4(B)(1) for ITC reversed as per Rule 42 and 43 (reversals due to exempt supplies and capital goods), and 4(B)(2) for "other reversals" including the 180-day non-payment reversal, reversal on cancellation of registration, and any voluntary reversals. The net ITC available for utilisation is = Total ITC claimed in 4(A) minus reversals in 4(B) minus ineligible ITC in 4(D). Accurate reporting is critical as discrepancies can trigger GST notices.

What is Rule 43 ITC reversal for capital goods?

Rule 43 governs reversal of ITC on capital goods that are used partly for exempt supplies or non-business purposes. Unlike Rule 42 (which is a lump-sum monthly reversal), Rule 43 requires the ITC on capital goods to be spread over 60 months (5 years) — i.e., 1/60th of the total ITC per month. The monthly amount attributable to exempt use is then reversed based on the exempt-to-total turnover ratio. If capital goods are exclusively used for taxable supplies, no reversal is needed. Reversal must continue even if the capital good is fully depreciated.

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