GST Rule 42 vs Rule 43: How to Calculate ITC Reversal on Common Credit

When a GST-registered business uses the same purchases for taxable or zero-rated supplies as well as exempt supplies, the entire input tax credit cannot automatically remain available. Section 17 of the CGST Act requires credit to be restricted to the portion attributable to business purposes and to taxable supplies, including zero-rated supplies. The detailed apportionment mechanism is split between Rule 42 for inputs and input services and Rule 43 for capital goods.

For the current statutory framework, refer to CBIC's active Section 17 text, active Rule 42 and active Rule 43. CBIC also maintains a readable input-tax-credit rules reference page. For return reporting, the GST Portal's current GSTR-3B user guide is especially useful.

Rule 42 and Rule 43: the core difference

• Rule 42: applies to common ITC on inputs and input services.
• Rule 43: applies to ITC on capital goods that are used commonly.
• Common principle: identify credit that is exclusively eligible or exclusively ineligible first, then apportion only the genuinely common pool.
• Zero-rated supplies: are treated on the taxable side of the apportionment framework, not as exempt supplies merely because output tax may not be charged.

This distinction prevents a common error: applying the monthly Rule 42 formula to machinery or other capital goods, or treating an ordinary recurring input expense as a Rule 43 asset.

How Rule 42 works for inputs and input services

Rule 42 starts with total input tax for the tax period, denoted by T. The rule then separates amounts that should not enter the common eligible pool.

1. T1: input tax attributable exclusively to non-business purposes.
2. T2: input tax attributable exclusively to exempt supplies.
3. T3: credit that is not available under Section 17(5).
4. C1: the balance after those exclusions, calculated as C1 = T - (T1 + T2 + T3).
5. T4: credit attributable exclusively to taxable supplies, including zero-rated supplies.
6. C2: the genuinely common credit, calculated as C2 = C1 - T4.

The exempt-supply portion of common credit is D1 = (E/F) × C2, where E represents the relevant exempt-supply value and F represents the relevant total turnover for the tax period under the rule. If common inputs or input services are also used partly for non-business purposes, D2 is 5% of C2. The remaining common eligible credit is C3 = C2 - (D1 + D2).

Worked Rule 42 example

Assume total input tax for a month is ₹1,00,000. Of this, ₹5,000 relates exclusively to non-business use, ₹10,000 exclusively to exempt supplies and ₹5,000 is blocked under Section 17(5). C1 is therefore ₹80,000. If another ₹50,000 is attributable exclusively to taxable and zero-rated supplies, the common pool C2 is ₹30,000.

If exempt turnover E is ₹2,00,000 and total turnover F is ₹10,00,000, D1 is 20% of ₹30,000, or ₹6,000. If the same common pool is also partly used for non-business purposes, D2 is 5% of ₹30,000, or ₹1,500. The remaining common eligible credit C3 is ₹22,500. The important control point is that the calculation is performed only after exclusive-use credits have been identified; otherwise the business can over-reverse eligible ITC.

How Rule 43 works for common capital goods

Rule 43 uses a different logic because capital goods provide benefit over several tax periods. Capital goods used exclusively for taxable supplies, including zero-rated supplies, are distinguished from assets used exclusively for exempt or non-business purposes. Assets used commonly enter the Rule 43 common-credit mechanism.

For common capital goods, the rule takes the useful life as five years. Common capital-goods credit is spread across 60 months; the monthly attributable amount is represented by Tm. For the common capital goods within their residual life, the relevant monthly common amount is aggregated as Tr, and the exempt-supply portion is calculated as Te = (E/F) × Tr under the rule.

Worked Rule 43 example

Suppose a machine used commonly for taxable and exempt business supplies carries eligible GST ITC of ₹6,00,000 and, for simplicity, it is the only common capital good in the example. Dividing the credit over 60 months gives a monthly common amount of ₹10,000. If the applicable exempt-to-total-turnover ratio for a month is 20%, the exempt-supply attribution for that month is ₹2,000. The calculation continues over the asset's applicable residual life under Rule 43 rather than reversing the entire ₹6,00,000 merely because exempt supplies exist.

Real portfolios can include several common assets acquired at different times, so a fixed-asset register should track invoice date, tax amount, use classification and residual life for each asset.

Where are Rule 42 and Rule 43 reversals reported in GSTR-3B?

The current GST Portal guide states that reversals under Rules 38, 42 and 43, along with Section 17(5) ineligible ITC, are reported in Table 4(B)(1) of GSTR-3B. The portal describes these as non-reclaimable or absolute reversals. This is different from temporary or reclaimable reversals such as certain Rule 37 cases, which are reported in Table 4(B)(2) and may later be reclaimed when the relevant conditions are satisfied.

That reporting distinction matters operationally. A Rule 42 or Rule 43 amount should not be pushed into the temporary-reversal bucket merely because the finance team expects taxable turnover to rise in a later month.

A practical monthly compliance workflow

1. Classify each inward item: input, input service or capital good.
2. Map usage: exclusively taxable or zero-rated, exclusively exempt, exclusively non-business, blocked under Section 17(5), or common.
3. Build Rule 42 common credit: remove exclusive categories before applying the E/F ratio.
4. Maintain the Rule 43 asset schedule: track common capital goods over the prescribed five-year or 60-month framework.
5. Reconcile turnover: use the values required by the rule for E and F, not an informal management-sales ratio.
6. Compute tax heads separately: maintain the calculation separately for the applicable IGST, CGST, SGST or UTGST components.
7. Post and report consistently: align the working paper, general ledger and GSTR-3B Table 4(B)(1).
8. Retain evidence: preserve invoice-level attribution, exempt-turnover workings, fixed-asset schedules and review notes supporting the calculation.

Common mistakes to avoid

• Applying Rule 42 to capital goods instead of Rule 43.
• Including exclusively taxable credit in C2 before applying the exempt-turnover ratio.
• Forgetting to remove exclusively exempt, non-business or blocked credits before identifying common credit.
• Treating zero-rated supplies as exempt supplies for this apportionment merely because the outward supply may be made without payment of tax.
• Reversing the entire ITC on a common capital asset upfront instead of applying the Rule 43 residual-life mechanism.
• Reporting a permanent Rule 42 or Rule 43 reversal in GSTR-3B Table 4(B)(2) instead of 4(B)(1).
• Using one combined spreadsheet without separate tax-head calculations or an audit trail back to invoices and assets.

Practical takeaway

Rule 42 and Rule 43 are both apportionment rules, but they operate on different credit pools. Rule 42 first isolates the common portion of inputs and input services and then applies the prescribed attribution formula. Rule 43 spreads common capital-goods credit across its prescribed useful life and attributes the exempt portion period by period. The most reliable process is to classify usage at source, maintain separate common-credit and fixed-asset workings, reconcile the turnover ratio, and report the resulting non-reclaimable reversal in the correct GSTR-3B bucket.