Summary: This article examines the interaction between Rule 37 and Rule 42 of the CGST Rules in situations where input tax credit (ITC) has already been partially reversed due to exempt supplies and the supplier remains unpaid beyond 180 days. Under Rule 37, ITC must be reversed proportionately to the unpaid amount, while Rule 42 requires proportionate reversal of common ITC attributable to exempt supplies. The article clarifies that taxpayers should not reverse the entire ITC under Rule 37 where a portion has already been reversed under Rule 42. Instead, the correct approach is to calculate Rule 37 reversal using the full GST amount mentioned in the invoice and thereafter reduce the ITC already reversed under Rule 42 to avoid duplication. Through practical illustrations, including scenarios involving partial payments and TDS deductions, it demonstrates the correct computation methodology and highlights common errors. The article also lists transactions excluded from Rule 37 and explains the treatment of TDS as payment to suppliers.
1. Coverage of this article:
a. In this article, I am discussing about the applicability of Rule 37 which is for reversal of ITC in case of non-payment of consideration to supplier & a common portion of ITC already has been reversed under Rule 42.
b. There is no requirement to reverse the full amount of ITC if Rule 42 applies on you.
c. Other practical scenarios that will be helpful for readers.
2. Rule: 37 applicability:
A registered person who has availed the ITC of Input, Input services or capital goods in GSTR-3B but recipient fails to pay the consideration to the supplier within 180 days from the date of invoice then recipient needs to reverse the ITC after the expiry of this period.
3. Ratio for reversal of ITC:
a. ITC will be reversed in the proportion of unpaid amount to the supplier.
b. Full amount of ITC will not be reversed in case of partially payment.
4. TDS impact on Rule 37:
TDs deposited to the government is also treated as a payment to the supplier.
5. List of transaction not covered in Rule 37:
a. Import of goods
b. Import of services
c. RCM transactions
d. Blocked credit transactions
e. ITC restriction due to POS rules
6. Applicability of Rule 42:
If a person selling exempt goods or services then he is required to reverse the ITC in proportion of exempt supplies related to the input & input services excluding capital goods.
7. Practical Scenario 1:
| S No | Particulars | Amount |
| 1 | Taxable value | 80,000 |
| 2 | GST @18% | 14,400 |
| 3 | Invoice value | 94,400 |
| 4 | Payment to supplier | 17,000 |
| 5 | Unpaid amount | 77,400 |
| 6 | Reversal of ITC under Rule 37 | 11,807 |
| 7 | Allowable amount of ITC | 2,593 |
a. Computation of Allowable ITC: GST amount/Invoice value* Paid amount
b. Computation of reversal of ITC: GST amount/Invoice value* Unpaid amount
c. There is no reversal under Rule 42.
d. No TDS deposited in this scenario.
8. Practical Scenario 2:
| S No | Particulars | Amount |
| 1 | Taxable value | 80,000 |
| 2 | GST @18% | 14,400 |
| 3 | Invoice value | 94,400 |
| 4 | Payment to supplier | 17,000 |
| 5 | TDS deposited | 8,000 |
| 6 | Unpaid amount | 69,400 |
| 7 | Reversal of ITC under Rule 37 | 10,586 |
| 8 | Allowable amount of ITC | 3,814 |
| 9 | Total payment | 25,000 |
a. Computation of Allowable ITC: GST amount/Invoice value* Paid amount
b. Computation of reversal of ITC: GST amount/Invoice value* Unpaid amount
c. In this example, I have considered the TDS component which is also a part of payment. Proportionate ITC is allowed in respect of TDS payment.
d. There is no reversal under Rule 42.
9. Practical Scenario 3:
Now, covering some scenarios with related to the Rule 42 in which some portion of ITC has already been reversed.
| S No | Particulars | Amount |
| 1 | Taxable value | 80,000 |
| 2 | GST @18% | 14,400 |
| 3 | Invoice value | 94,400 |
| 4 | Payment to supplier | 17,000 |
| 5 | Unpaid amount | 77,400 |
| 6 | Reversal of ITC | 11,807 |
| 7 | Allowable amount of ITC | 2,593 |
| 8 | ITC reversed under Rule 42 | 568 |
| 9 | Net amount to be reversed under Rule 37 (6-8) | 11,239 |
a. Computation of Allowable ITC: GST amount/Invoice value* Paid amount
b. Computation of reversal of ITC: GST amount/Invoice value* Unpaid amount
c. Method of computation will remain same. Do not use the other technique by taking the net GST amount i.e. total GST – ITC already reversed instead of taking the total GST figure.
d. Wrong computation:
| S No | Particulars | Amount |
| 1 | Taxable value | 80,000 |
| 2 | GST @18% | 14,400 |
| 3 | Invoice value | 94,400 |
| 4 | Payment to supplier | 17,000 |
| 5 | Unpaid amount | 77,400 |
| 6 | ITC reversed under Rule 42 | 568 |
| 7 | Net GST | 13,832 |
| 8 | Reversal of ITC under Rule 37 | 11,341 |
| 9 | Allowable amount of ITC | 2,491 |
a. Computation of Allowable ITC: Net GST amount/Invoice value* Paid amount
b. Computation of reversal of ITC: Net GST amount/Invoice value* Unpaid amount
c. This is the wrong method of computation because we will consider the actual GST amount as per the Tax Invoice.
10. Practical Scenario 4:
| S No | Particulars | Amount |
| 1 | Taxable value | 80,000 |
| 2 | GST @18% | 14,400 |
| 3 | Invoice value | 94,400 |
| 4 | Payment to supplier | 17,000 |
| 5 | TDS deposited | 7,600 |
| 6 | Unpaid amount | 69,800 |
| 7 | Reversal of ITC | 10,647 |
| 8 | Allowable amount of ITC | 3,753 |
| 9 | ITC reversed under Rule 42 | 568 |
| 10 | Net amount to be reversed under Rule 37 | 10,079 |
a. Computation of Allowable ITC: GST amount/Invoice value* Paid amount
b. Computation of reversal of ITC: GST amount/Invoice value* Unpaid amount
c. I have explained the correct method of computation. Kindly avoid any other types of method for calculation of ITC reversal under Rule 37.
11. Refer to the article for Rule 37: GST Rule 37: Reversal of ITC in case of non-payment of consideration
12. Refer to the article for Rule 42: CGST Rule 38 Claim of credit by banking company or financial institution
13. Bare Act of Rule 37: Reversal of input tax credit in the case of non-payment of consideration:
1[(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply 3[whether wholly or partly,] along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay 4[or reverse] an amount equal to the input tax credit availed in respect of such supply 5[, proportionate to the amount not paid to the supplier,] along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:
Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:
Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.
(2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).]
(3) 2[****]
(4) The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.
14. Note:
a. Method of computation of reversal of ITC under Rule 37 will remain same in all the scenarios explained above irrespective of the applicability of Rule 42.
b. Allowable amount:
GST as per invoice/Invoice value* (Payment to supplier & TDS deposited)
c. Reversible amount:
GST as per invoice/Invoice value* unpaid amount
d. Net reversible amount in case of Rule 42:
Net amount to be reversed under Rule 37 = Amount calculated in point C (-) ITC already reversed under Rule 42.
e. The impact of ITC already reversed under Rule 42 shall not be taken in B & C point.
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Disclaimer: The views and opinions expressed in this article are those of the author. This article is intended for general information purposes only and does not constitute professional advice. Readers are strongly advised to consult a qualified professional for guidance specific to their individual situation before making any financial, legal, or tax-related decisions. The author shall not be held liable for any loss or damage of any kind incurred as a result of the use of this information or for any actions taken based on the content of this article.
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