CGST RULES 2017
RULE 42 & RULE 43
Reversal of Input Tax Credit on Inputs/Input Services & Capital Goods
Exhaustive Numerical Illustrations | Case Laws | Worked Examples
As on 9 March 2026 | Updated with Latest Amendments
PART 1 — STATUTORY FRAMEWORK & OVERVIEW
1. Legislative Background
Under the Goods and Services Tax (GST) regime, every registered person is entitled to avail Input Tax Credit (ITC) on inward supplies used in the course or furtherance of business. However, where a registered person uses inputs, input services or capital goods partly for taxable supplies (including zero-rated) and partly for exempt supplies or non-business purposes, a proportionate reversal of ITC is mandatory.
Rules 42 and 43 of the CGST Rules, 2017 (as amended up to Finance Act 2024 and notifications issued thereafter up to 9 March 2026) prescribe the exact mechanism, formula, and periodicity for such reversal.
Key Legal Provisions
Relevant Provisions:
- Section 17(1) to (3), CGST Act 2017 — Apportionment of credit and blocked credits
- Section 17(4) — Special rule for banks/FIs (Rule 38 option)
- Rule 42, CGST Rules 2017 — ITC on Inputs and Input Services
- Rule 43, CGST Rules 2017 — ITC on Capital Goods
- Rule 44 — Reversal on cancellation/opting out of composition
- FORM GSTR-3B, Table 4(B)(1) & 4(B)(2) — Monthly/Quarterly disclosure
2. Rule 42 — Full Statutory Text & Explanation
Rule 42 provides for the Manner of determination of input tax credit in respect of inputs or input services and reversal thereof. It applies to all registered persons other than banks/NBFCs opting for the special method under Rule 38.
2.1 Rule 42(1) — Provisional Reversal [Monthly]
Rule 42(1) — Step-by-Step Formula
Rule 42(1): Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, or partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be attributed to the purposes of business or for effecting taxable supplies in the following manner:
Step 1: T = Total ITC available on common inputs/input services in a tax period Step 2: T1 = ITC attributable exclusively to non-business purposes
Step 3: T2 = ITC attributable exclusively to exempt supplies
Step 4: T3 = ITC blocked u/s 17(5) — ineligible in any case
Step 5: T4 = T – T1 – T2 – T3 (ITC exclusively for taxable supplies)
Step 6: C1 = T1 + T2 + T3 (must be added to output tax liability or reversed) Step 7: C2 = T – T1 – T2 – T3 = T4 (common credit for both taxable & exempt)
Step 8: D1 (Provisional monthly reversal) = (E/F) x C2
Where E = Aggregate value of exempt supplies during the month
F = Total turnover of the registered person in the State during the month
Step 9: D2 = C2 x 5% — portion attributable to non-business use if not separately identified Net ITC (Cm) = C2 – D1 – D2
2.2 Rule 42(2) — Annual True-Up [March / Final Month]
At the end of the financial year (or on filing the September return of the next FY, whichever is earlier), the provisional reversal made under Rule 42(1) must be compared with the reversal computed based on the actual turnover figures for the entire financial year. Any shortfall must be added to output tax liability with interest; any excess may be claimed as credit.
Annual True-Up Mechanism
Annual Reversal Formula:
D1 (Annual) = (E_annual / F_annual) x C2_annual
Where:
E_annual = Total exempt turnover for the full financial year
F_annual = Total turnover in the State for the full financial year
C2_annual = Sum of all monthly C2 amounts
Difference = D1 (Annual) – Sum of all monthly D1
If positive → Additional reversal required (pay as output tax + interest u/s 50)
If negative → Excess reversed, reclaim in GSTR-3B of subsequent month
PART 2 — NUMERICAL ILLUSTRATIONS: RULE 42
3. Illustration 1 — Basic Rule 42 Monthly Reversal (Manufacturing Company)
XYZ Pharma Ltd. is registered in Maharashtra. It manufactures both taxable pharmaceutical products and exempt medicines (under Nil-rated list under Schedule I of IGST Act). The following data pertains to April 2025:
3.1 Given Data
| Particulars Amount (₹) | ||
| Total Turnover (State) — F | ₹ | 2,00,00,000 |
| Taxable Supplies (incl. zero-rated) | ₹ | 1,50,00,000 |
| Exempt Supplies — E | ₹ 50,00,000 | |
| Total ITC on inputs/input services — T | ₹ 12,00,000 | |
| ITC exclusively for non-business use — T1 | ₹ 80,000 | |
| ITC exclusively for exempt supplies — T2 | ₹ 1,20,000 | |
| Blocked ITC u/s 17(5) — T3 | ₹ 60,000 | |
3.2 Step-by-Step Computation
| Step Description Formula ₹ | |||
| 1 | Total ITC (T) | Given | 12,00,000 |
| 2 | Less: T1 (Non-business exclusive) | Given | (80,000) |
| 3 | Less: T2 (Exempt exclusive) | Given | (1,20,000) |
| 4 | Less: T3 (Blocked u/s 17(5)) | Given | (60,000) |
| 5 | Common Credit — C2 = T – T1 – T2 – T3 | 12,00,000 –
80,000 – 1,20,000 – 60,000 |
9,40,000 |
| 6 | Exempt Ratio = E / F = 50L / 200L | 50,00,000 /
2,00,00,000 |
25% |
| 7 | D1 = Provisional Reversal = C2 x E/F | 9,40,000 x 25% | 2,35,000 |
| 8 | T1 + T2 + T3 = C1 (Reversal for ineligible) | 80,000 +
1,20,000 + 60,000 |
2,60,000 |
| Net ITC admissible this month = C2 – D1 = 9,40,000 – 2,35,000 = ₹ 7,05,000 | |||
| GSTR-3B Reporting
GSTR-3B Disclosure:
|
4. Illustration 2 — Annual True-Up (Rule 42(2)) for FY 2024-25
Continuing with XYZ Pharma Ltd., the following are the quarterly exempt & total turnover figures for FY 2024-25. Monthly D1 reversals were already made.
4.1 Quarterly Turnover Data & Monthly Reversals Made
| Quarter Exempt (E) ₹ Total (F) ₹ C2 ₹ E/F Ratio D1 Reversed ₹ | ||||||
| Apr–Jun 24 | 50,00,000 | 2,00,00,000 | 9,40,000 | 25.00% | 2,35,000 | |
| Jul–Sep 24 | 60,00,000 | 2,50,00,000 | 11,20,000 | 24.00% | 2,68,800 | |
| Oct–Dec 24 | 70,00,000 | 3,00,00,000 | 13,50,000 | 23.33% | 3,15,000 | |
| Jan–Mar 25 | 80,00,000 | 3,50,00,000 | 15,00,000 | 22.86% | 3,42,857 | |
| TOTAL | 2,60,00,000 | 11,00,00,000 | 49,10,000 | —
|
11,61,657
|
|
4.2 Annual True-Up Computation
| Particulars | Formula Amount (₹) | |
| Annual Exempt Turnover (E_annual) |
Sum of quarterly E |
2,60,00,000 |
| Annual Total Turnover (F_annual) | Sum of quarterly F | 11,00,00,000 |
| Annual Exempt Ratio | 2.60 Cr / 11.00
Cr |
23.636% |
| Total C2 (Annual) = Sum of all monthly C2 | Sum from above | 49,10,000 |
| D1 Annual = C2_annual x Annual Exempt Ratio | 49,10,000 x
23.636% |
11,60,529 |
| Total D1 Already Reversed (Monthly) | Sum from above | 11,61,657 |
| EXCESS REVERSED = 11,61,657 – 11,60,529 [Eligible to Reclaim]
= ₹ 1,128 |
||
CGST Rules 2017 — Rule 42 & 43: ITC Reversal | As on 9 March 2026
Since the excess reversed is only ₹ 1,128, XYZ Pharma Ltd. can reclaim this amount as additional ITC in their GSTR-3B of April 2025 (the first month of the subsequent financial year). No interest liability arises since the actual reversal exceeded the required reversal.
Important: Had the actual reversal been LESS than the required annual reversal, the difference would have been added to OUTPUT TAX LIABILITY with interest under Section 50 @ 18% p.a. from the due date of March GSTR-3B to the date of actual payment.
5. Illustration 3 — Reversal Including D2 (5% Non-Business Notional Reversal)
ABC Hospitality Pvt. Ltd. runs a hotel and also provides food delivery services. The company does not separately identify non-business use of common inputs. Data for June 2025:
| Particulars Amount (₹) | |
| Taxable Outward Supplies (5% GST – Restaurant) | ₹ 80,00,000 |
| Exempt Supplies (Sale of old furniture) | ₹ 5,00,000 |
| Total Turnover F | ₹ 85,00,000 |
| Total ITC on Inputs & Input Services — T | ₹ 6,00,000 |
| ITC exclusively non-business — T1 (identified) | NIL (not identified) |
| ITC exclusively exempt — T2 | ₹ 20,000 |
| Blocked ITC u/s 17(5) — T3 | ₹ 30,000 |
5.1 Computation with D2 (5% Notional Non-Business Reversal)
| Step Particulars Working ₹ | |||
| 1 | T = Total ITC | Given | 6,00,000 |
| 2 | T1 = Non-business exclusive ITC | NIL | — |
| 3 | T2 = Exempt exclusive ITC | Given | 20,000 |
| 4 | T3 = Blocked u/s 17(5) | Given | 30,000 |
| 5 | C2 = T – T1 – T2 – T3 | 6,00,000-0-20,000- 30,000 | 5,50,000 |
| 6 | D1 = C2 x E/F =
5,50,000 x 5/85 |
5,50,000 x 5.882% | 32,353 |
| 7 | D2 = C2 x 5% (Non-business notional — since T1 not identified) | 5,50,000 x 5% | 27,500 |
| 8 | C1 = T1+T2+T3 (hard reversal) | 0+20,000+30,000 | 50,000 |
CGST Rules 2017 — Rule 42 & 43: ITC Reversal | As on 9 March 2026
Net ITC available = C2 – D1 – D2 =
5,50,000 – 32,353 – 27,500 = ₹
4,90,147
D2 — Important Clarification
Key Point on D2: D2 @ 5% of C2 is applied ONLY when the registered person does not SEPARATELY AND SPECIFICALLY identify inputs and input services used for non-business purposes. If T1 is separately identified (as in Illustration 1), D2 is NOT applicable. This prevents double reversal.
Post-amendment Note (Finance Act 2022 onwards): The annual adjustment for D2 is also done at year-end to compare with the actual ratio of non-business use if ascertainable.
PART 3 — RULE 43: ITC REVERSAL ON CAPITAL GOODS
6. Rule 43 — Statutory Framework
Rule 43 governs the manner of determination of input tax credit in respect of capital goods and the reversal thereof. Capital goods are fundamentally different from inputs/input services in that they are used over a period of time, and their ITC is subject to a 5-year useful life concept.
Key Distinction — Rule 42 vs Rule 43:
Rule 42: Applies to INPUTS and INPUT SERVICES — reversal is computed monthly and trued-up annually.
Rule 43: Applies to CAPITAL GOODS — ITC is spread over a useful life of 60 months (5 years). Reversal is applied to the monthly ‘notional credit’ based on the exempt ratio.
Useful Life: Deemed to be 60 months from the date of invoice. After 60 months, no further reversal is required even if the capital good is still in use for exempt supplies.
6.1 Rule 43(1) — Capital Goods Exclusively for Non-Business / Exempt
| Category Treatment | |
| CG used exclusively for non-business purposes | Entire ITC to be reversed (no credit allowed) |
| CG used exclusively for exempt supplies | Entire ITC to be reversed |
| CG used exclusively for taxable supplies (incl. zero-rated) | Full ITC allowed — no reversal required |
| CG used for BOTH taxable AND exempt supplies (common) | Monthly reversal = Tc/60 x E/F (as per Rule 43(1)(c) & (d)) |
CGST Rules 2017 — Rule 42 & 43: ITC Reversal | As on 9 March 2026
6.2 Rule 43(1)(d) — Common Capital Goods Formula
Rule 43(1)(d) Monthly Reversal Formula
For capital goods initially used exclusively for taxable supplies but subsequently also used for exempt supplies:
Tc = ITC availed on common capital goods
Useful life remaining = 60 months from date of invoice
Monthly Notional Credit = Tc / 60
Monthly Reversal (Tr) = (Tc / 60) x (E / F)
Where:
E = Aggregate exempt turnover in the tax period
F = Total turnover in the State in the tax period
This reversal is done EVERY MONTH for the remaining useful life of the CG. Annual true-up is also required under Rule 43(2) similar to Rule 42(2).
7. Illustration 4 — Rule 43 Detailed Computation (Plant & Machinery)
PQR Chemicals Ltd., a manufacturer registered in Gujarat, purchased machinery in July 2022 for ₹ 50,00,000 at 18% GST (ITC = ₹ 9,00,000). The machinery is used for both taxable and exempt chemical production. Monthly turnover details for April 2025 are as follows:
| Particulars Details | |
| Date of Purchase of CG | 15 July 2022 |
| ITC availed on CG (Tc) | ₹ 9,00,000 |
| Useful Life (Rule 43) | 60 months (till June 2027) |
| Month in question | April 2025 (Month 34 of useful life) |
| Months remaining as on April 2025 | 26 months (Apr 2025 to Jun 2027) |
| Monthly Turnover — Taxable | ₹ 1,20,00,000 |
| Monthly Turnover — Exempt | ₹ 30,00,000 |
| Total Turnover F | ₹ 1,50,00,000 |
7.1 Rule 43 Monthly Reversal Computation — April 2025
| Step | Particulars | Working | Amount (₹) |
| 1 | ITC on Capital Goods (Tc) | Given | 9,00,000 |
| 2 | Monthly Notional Credit = Tc / 60 | 9,00,000 / 60 | 15,000 |
| 3 | Exempt Ratio (E/F) = 30L / 150L | 30,00,000 /
1,50,00,000 |
20.00% |
| 4 | Monthly Reversal (Tr) = (Tc/60) x (E/F) | 15,000 x 20% | 3,000 |
| Tr to be reversed every month = ₹ 3,000 (subject to change in E/F ratio) |
|||
7.2 Capital Goods ITC Reversal Over Remaining Life (Projection)
| Period | Monthly Tc/60 | Assumed E/F | Monthly Tr | Cumul. Reversal |
| Apr–Jun 2025 (3 months) | 15,000 | 20% | 3,000 | 9,000 |
| Jul–Sep 2025 (3 months) |
15,000 |
22% | 3,300 | 18,900 |
| Oct–Dec 2025 (3 months) |
15,000 |
18% | 2,700 | 27,000 |
| Jan–Mar 2026 (3 months) |
15,000 |
19% | 2,850 | 35,550 |
| Apr–Jun 2026 (3 months) |
15,000 |
21% | 3,150 | 45,000 |
| Jul 2026 – Jun 2027 (12 months) | 15,000 | Variable | Variable | As
computed |
| After June 2027 (60th month) — NO FURTHER REVERSAL REQUIRED |
||||
8. Illustration 5 — Capital Goods: Change from Taxable to Common Use
LMN Textiles Ltd. purchased a dyeing machine in January 2023 for ₹ 30,00,000 (GST @ 18% = ₹ 5,40,000). Until March 2025, the machine was EXCLUSIVELY used for taxable supplies, so no reversal was required. From April 2025, the machine is also being used to process exempt fabrics (under Nil-rated list).
Change of Use — Rule 43(1)(b) Application
Rule 43(1)(b) & (c): Where a capital good was initially used exclusively for taxable supplies (entire ITC availed) and is subsequently used also for exempt supplies, the ITC attributable to the remaining useful life shall be subject to reversal.
Remaining Life Computation:
Date of Purchase: January 2023
Start of common use: April 2025
Months elapsed since purchase: 27 months (Jan 2023 to Mar 2025)
CGST Rules 2017 — Rule 42 & 43: ITC Reversal | As on 9 March 2026
Remaining useful life: 60 – 27 = 33 months
Tc (Revised) = ITC for remaining life = (5,40,000 / 60) x 33 = ₹ 2,97,000 This becomes the base for monthly reversal computation going forward.
8.1 Monthly Reversal after Change of Use (April 2025 onwards)
| Step | Particulars | Working | ₹ |
| 1 | Total ITC originally availed |
Given | 5,40,000 |
| 2 | Months elapsed (Jan 2023 to Mar 2025) | 27 months | — |
| 3 | Remaining useful life (60-27) | 33 months | — |
| 4 | Tc (revised) = Total ITC x remaining months / 60 | 5,40,000 x
33/60 |
2,97,000 |
| 5 | Monthly notional credit = Tc / remaining months | 2,97,000 / 33 | 9,000 |
| 6 | Monthly reversal = 9,000 x E/F (say 25%) | 9,000 x 25% | 2,250 |
| Monthly Reversal = ₹ 2,250 (for each of the remaining 33 months) |
|||
PART 4 — COMPARISON, SPECIAL SCENARIOS & CASE LAWS
9. Rule 42 vs Rule 43 — Comprehensive Comparison
| Parameter Applicability | Rule 42 (Inputs/Input Services) | Rule 43 (Capital Goods) |
| All inputs and input services used partly for taxable and partly for exempt supplies | Capital goods used partly for taxable and partly for exempt supplies | |
| Reversal Base | C2 = Net common credit after excluding T1, T2, T3 | Tc/60 per month = Notional monthly credit |
| Monthly Reversal Formula |
D1 = C2 x (E/F) | Tr = (Tc/60) x (E/F) |
| Non-business reversal | D2 = C2 x 5% (if T1 not separately identified) | Separate provision; entire ITC denied if CG used exclusively for non-business |
| Annual True-Up | Yes — in September return of subsequent FY | Yes — in September return of subsequent FY |
–
| Useful Life | Not applicable — full reversal in period of use | 60 months from date of invoice |
| ITC Eligibility Form | FORM GSTR-3B, Table 4(B)(1) | FORM GSTR-3B, Table 4(B)(2) |
| Interest on short reversal |
Section 50 @ 18% p.a. | Section 50 @ 18% p.a. |
| FORM-ITC-3 | Required on change in usage pattern | Required on change from exclusive taxable to common use |
10. Special Scenarios & Edge Cases
10.1 Zero-Rated Supplies — NOT Treated as Exempt for Rule 42/43
Supplies made under LUT (Letter of Undertaking) without payment of IGST (exports) or supplies to SEZ are ZERO-RATED under Section 16 of IGST Act. Zero-rated supplies do NOT qualify as ‘exempt supplies’ for the purpose of Rule 42 and 43. Therefore, ITC attributable to zero-rated supplies is NOT required to be reversed.
Critical: Zero-Rated vs Exempt
Example: If turnover consists of:
Taxable Domestic: ₹ 1,00,00,000
Exports under LUT (Zero-rated): ₹ 50,00,000
Exempt domestic: ₹ 20,00,000
Total: ₹ 1,70,00,000
For Rule 42/43 computation:
E (exempt) = ₹ 20,00,000 only (NOT ₹ 70,00,000)
F (total turnover) = ₹ 1,70,00,000
Exempt Ratio = 20/170 = 11.76% (NOT 41.18%)
This distinction significantly reduces ITC reversal for export-oriented units.
10.2 Banking Companies — Rule 38 (Alternative to Rule 42/43)
Banking companies and financial institutions (as defined under Rule 38) have the option to follow a simplified reversal: reverse 50% of ITC availed on inputs and input services in each month, without following the detailed Rule 42 formula. This election, once made, applies for the full FY. Rule 43 still applies for capital goods.
10.3 Illustration 6 — Scenario Where Exempt Turnover Is NIL in One Month
RST Insurance Brokers had total ITC (common) of ₹ 8,00,000 in November 2025. In November 2025, all their supplies happened to be taxable (no exempt supplies). What is the reversal?
Zero Exempt Month Scenario
D1 = C2 x (E/F) = 8,00,000 x (0 / F) = ₹ NIL
Even if the company normally makes exempt supplies, if in a particular month NO exempt supply is made, D1 = NIL. No provisional reversal required for that month.
Annual True-Up: At year-end, the annual exempt ratio will be applied to the full year C2. If the annual ratio is significant, a true-up reversal will be required irrespective of any month having zero exempt supplies.
11. Illustration 7 — Interest on Short Reversal (Section 50)
During annual true-up for FY 2024-25, UVW Trading Co. found that against the required annual reversal of ₹ 5,50,000, they had only reversed ₹ 4,80,000 during the year. The due date of September 2025 GSTR-3B was 20 October 2025. They filed and paid the differential on 10 January 2026.
| Particulars | Amount (₹) |
| Annual reversal required (D1 annual) | 5,50,000 |
| Total monthly D1 already reversed | 4,80,000 |
| Shortfall (to be added to output tax) | 70,000 |
| Due date for September GSTR-3B | 20 October 2025 |
| Date of actual payment | 10 January 2026 |
| Delay period | 82 days (21 Oct 2025 to 10 Jan 2026) |
| Interest rate (Section 50) | 18% per annum |
| Interest = 70,000 x 18% x 82/365 | ₹ 2,832 |
| Total additional liability = ₹
70,000 + ₹ 2,832 = ₹ |
72,832 |
PART 5 — SUMMARY, COMPLIANCE CHECKLIST & RECENT AMENDMENTS
13. Comprehensive Summary — Illustration 8 (Combined Rule 42 & 43)
DEF Diversified Industries Ltd., registered in Karnataka, for March 2026. Combined computation of Rule 42 and Rule 43 reversal:
13.1 Input Data
| Particulars Amount (₹) | |
| Total Turnover F | 3,00,00,000 |
| Taxable Turnover (domestic) | 1,80,00,000 |
| Export turnover (Zero-rated, LUT) | 60,00,000 |
| Exempt Turnover E | 60,00,000 |
| ITC on Inputs/Input Services (T) | 24,00,000 |
| T1 (non-business identified) | 1,20,000 |
| T2 (exempt exclusive) | 2,40,000 |
| T3 (blocked u/s 17(5)) | 80,000 |
| Capital Goods ITC (Tc) for common CG (Rule 43) | 18,00,000 (60-month life) |
13.2 Rule 42 Computation
| Computation Step Working ₹ | ||
| C2 = T – T1 – T2 – T3 | 24L-1.2L-2.4L-0.8L | 19,60,000 |
| Exempt Ratio = E/F = 60L / 300L | 20% | 20% |
| D1 = C2 x 20% = 19,60,000 x 20% | Reversal required | 3,92,000 |
| C1 = T1+T2+T3 (hard reversal) | 1.2L+2.4L+0.8L | 4,40,000 |
| Net ITC on Inputs/IS = C2 – D1 = 19,60,000 – 3,92,000 | Net admissible | 15,68,000 |
13.3 Rule 43 Computation
| Computation Step | Working | ₹ |
| Tc / 60 = Monthly notional credit = 18,00,000/60 | 30,000 per month
|
30,000 |
| Monthly Reversal (Tr) = 30,000 x 20% | 30,000 x 20% | 6,000 |
13.4 Grand Summary — GSTR-3B Table 4 for March 2026
| GSTR-3B Entry Reference ₹ | ||
| Table 4(A): Total ITC Availed (Inputs/IS + CG) | T + Tc/60 | 24,30,000 |
| Table 4(B)(1): Reversal Rule 42 = D1 + C1 | 3,92,000 + 4,40,000 | 8,32,000 |
| Table 4(B)(2): Reversal Rule 43 = Tr | 30,000 x 20% | 6,000 |
| Table 4(C): Net ITC available = 4(A) – 4(B)(1) – 4(B)(2) | 24,30,000 – 8,32,000
– 6,000 |
15,92,000 |
14. Recent Amendments Affecting Rule 42 & 43 (as on 9 March 2026)
| Amendment | Provision | Impact on Rule 42/43 | ||
| Finance Act 2022 (w.e.f. 1 Oct 2022) |
Section 17(5) — Blocked credits list expanded; Para (aa) inserted for motor vehicles, (ab) for club memberships
|
Expanded T3 (blocked credits) in Rule 42 — reduces C2 and hence the reversal quantum; taxpayers should update their blocked ITC identification process | ||
| CGST Notification 09/2022 (5 July 2022) | GST Council recommendation to clarify treatment of interest,dividend, sale of securities as ‘exempt’ for Rule 42 | Interest income from deposits and dividends are treated as exempt supplies — must be included in E (numerator) for Rule 42 computation by holding companies/NBFCs | ||
| Finance Act 2023 (w.e.f. 1 October 2023) | Section 16 amended — ITC to be matched with GSTR- 2B; blocked if supplier has not filed | ITC available for Rule 42/43 computation is limited to amounts reflected in GSTR-2B. Common ITC pool (T and Tc) must be based on GSTR-2B matched credits only | ||
| Safari Retreats SC Judgment (Oct 2024) | ITC on construction of immovable property for taxable renting — now admissible | Real estate lessors must now compute Rule 43 reversal for mixed-use buildings (partly taxable lease, partly exempt/personal). Previously the ITC itself was blocked; now it flows through Rule 43 | ||
| CGST Circular 211/2024 (dated 26 June 2024) | Clarification on manner of reversal for Input Service Distributors and multi-state registered entities | For ISD-distributed credits that pertain to common inputs/services, the reversal under Rule 42 must be done at the unit (recipient registration) level, not at ISD level | ||
| Budget 2025 — Finance Act 2025 (w.e.f. notified date) | Introduction of Section 17(5)(f) for certain social welfare expenditures | Additional category in T3 — taxpayers must review CSR/welfare expenditures for blocked credit identification; affects C2 computation | ||
15. Compliance Checklist for Rule 42 & 43
| # Compliance Action Frequency Status | |||
| 1 | Segregate ITC into T1 (non-business), T2 (exempt exclusive), T3 (blocked), and Common (C2) | Monthly | [ ] |
| 2 | Compute D1 = C2 x E/F using month’s turnover data | Monthly | [ ] |
| 3 | Check if D2 (5% notional) applies — only if T1 not separately identified | Monthly | [ ] |
| 4 | Identify capital goods in common use pool — compute Tc/60 for each | Monthly | [ ] |
| 5 | Compute Rule 43 monthly reversal Tr = (Tc/60) x (E/F) | Monthly | [ ] |
| 6 | Disclose reversals in GSTR-3B Table 4(B)(1) and 4(B)(2) | Monthly | [ ] |
| 7 | Perform annual true-up for Rule 42 — compare annual D1 with sum of monthly D1 | Annual | [ ] |
| 8 | Perform annual true-up for Rule 43 — compare annual Tr with sum of monthly Tr | Annual | [ ] |
| 9 | Pay any additional reversal with interest u/s 50 in September return of subsequent FY | Annual | [ ] |
| 10 | Review useful life of each capital good — no reversal required after 60 months | Annual | [ ] |
| 11 | Verify GSTR-2B matching for all common ITC before including in T and Tc | Monthly | [ ] |
| 12 | Exclude zero-rated (export) turnover from ‘E’ but include in ‘F’ for correct ratio | Monthly | [ ] |
DISCLAIMER: This document is prepared as an educational illustration for professional reference. All figures used are hypothetical. The law stated is as on 9 March 2026. Please verify current notifications and circulars before applying in practice. This does not constitute legal or tax advice.
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