Indirect Tax Laws · Input Tax Credit

Apportionment of Credit and Reversals (Section 17, Rules 42, 43 and 37)

Updated 5 October 2026 · Fact-checked

ITC apportionment allows credit only for business use in making taxable supplies. Under Rule 42 you separate exempt-only, blocked, taxable-only and common credit, then reverse common credit in the ratio of exempt turnover to total turnover. Rule 43 spreads capital goods credit over 60 months. Rule 37 reverses credit if the supplier stays unpaid beyond 180 days.

Understand Apportionment of Credit and Reversals

GST credit is meant for tax paid on inputs used to make taxable supplies. So Section 17 restricts it. Credit is allowed only for business purposes. If goods or services are used partly for taxable (including zero-rated) supplies and partly for exempt supplies, credit is allowed only to the extent it relates to the taxable supplies.

In practice most inputs are not tagged to one type of supply. You take the full credit in the month and then work out how much is not eligible. Rule 42 does this for inputs and input services. Rule 43 does this for capital goods.

The value of exempt supplies for this purpose excludes supplies on which the recipient pays tax under reverse charge. It includes transactions in securities, sale of land and, subject to Schedule II para 5(b), sale of building. This is why a company that sells land or securities on the side can face a reversal even if its main business is fully taxable.

Rule 42 works on a month-by-month provisional basis and is then recomputed for the whole year. The recomputation is made in the return for September of the following financial year (not later than the annual return due date, if that is earlier). If the annual figure is higher than what you reversed, you pay the difference with interest under Section 50. If lower, you may take the excess back.

Capital goods are different because they last for years. So Rule 43 takes full credit up front but treats the credit as spread over a useful life of five years (60 months), and reverses a small slice every month in the exempt ratio. The Rule 43 monthly reversals are also provisional. They are recomputed on annual figures in the same way as Rule 42(2), as provided in Rule 43(1)(e) to (h). The annual aggregate ratio is used, and any shortfall is paid with interest while any excess may be reclaimed.

A separate reversal is Rule 37. If you do not pay the supplier the invoice value plus tax within 180 days of the invoice date, you must add the proportionate ITC to your output tax with interest. You can take it again once you pay. This rule does not apply where tax is payable by you under reverse charge.

Key rules to remember

Section 17(1) and 17(2) rule: ITC allowed = credit for business use in taxable (incl. zero-rated) supplies only; Credit for non-business use and for exempt supplies is not allowed. Blocked credits under Section 17(5) are also out.
Rule 42 – common credit: C1 = T − T1 − T2; C2 = C1 − T3; T = total ITC for the month on inputs and input services. T1 = credit exclusively for exempt supplies and non-business use. T2 = blocked credit under 17(5). T3 = credit exclusively for taxable and zero-rated supplies. C2 = common credit that must be apportioned.
Rule 42 – reversal on common credit: D = (E ÷ F) × C2; E = aggregate value of exempt supplies in the tax period. F = total turnover in the State or Union territory in the same period. D is the ineligible common credit, added to output tax liability.
Rule 42 – eligible credit: Eligible ITC = T − T1 − T2 − D; Equal to T3 plus the eligible part of C2.
Rule 42 – annual recomputation: Final reversal = (annual E ÷ annual F) × annual common credit; compare with the monthly total; The recomputation is made in the return for September of the following financial year (not later than the annual return due date, if earlier). It is applied to the aggregate for the whole year. Any shortfall is paid with interest under Section 50. Excess can be reclaimed.
Rule 43 – capital goods monthly credit: Tm = Tc ÷ 60; Tc = ITC on the capital goods. Useful life is taken as 5 years from the invoice date. Applies to capital goods used for both taxable and exempt supplies.
Rule 43 – monthly reversal: Te = (E ÷ F) × Tm; E and F are the exempt and total turnover for the tax period. Te is added to output tax liability each month. It is recomputed on annual figures in the same way as Rule 42(2), with interest on any shortfall.
Rule 43 – exclusive use: Exclusively taxable use: full credit. Exclusively exempt or non-business use: no credit; The 60-month method applies only to capital goods used commonly.
Rule 37 – 180-day rule: Reversal = ITC × (unpaid value ÷ invoice value incl. tax), plus interest under Section 50; Applies when the supplier is not paid within 180 days from the invoice date. Not applicable to supplies on which you pay tax under reverse charge. Credit can be re-availed on payment.

How to solve Apportionment of Credit and Reversals questions

Use this order for any Rule 42, Rule 43 or Rule 37 question. It stops you from mixing up the three rules.

1Read the facts and tag each item as: inputs or input services, capital goods, or an unpaid invoice.
2For inputs and input services, list the monthly ITC (T) and remove blocked credit under Section 17(5) (T2) and exclusive exempt or non-business credit (T1).
3Remove credit used exclusively for taxable and zero-rated supplies (T3). The balance is common credit C2.
4Work out E and F. Include in E the items Section 17(3) puts into exempt value, such as sale of land and securities. Then compute D = (E ÷ F) × C2.
5For capital goods used commonly, divide the credit by 60 to get Tm, then multiply by the E ÷ F ratio of that month to get Te. Check that the useful-life window of 5 years has not ended.
6For an unpaid supplier, check the 180-day period from the invoice date, exclude reverse-charge supplies, and reverse only the ITC on the unpaid part. Add interest.
7State the result as: ITC eligible, amount reversed, and how it is shown (added to output tax liability). Mention annual recomputation for Rule 42 and for the Rule 43 monthly reversals if the question is about a full year.

Quickest way: Four-line table method for Rule 42

When to use it: Use it when the question gives total ITC and several breakups and asks for the net eligible credit or reversal.

Write T and subtract T1 and T2 straight away. This gives C1.
Subtract T3 from C1 to get C2. Circle C2 because only this amount is apportioned.
Compute the ratio E ÷ F as a percentage first, then apply it to C2 only. Never apply it to T.
Check your answer: T3 + (C2 − D) should equal the eligible credit, and T − T1 − T2 − D should give the same number.

Common mistakes in Apportionment of Credit and Reversals

Applying the E ÷ F ratio to total ITC instead of only common credit.
Students rush and skip the step of removing exclusive-use and blocked credit.
Fix: Always compute C2 first. The ratio applies to C2 and nothing else.
Leaving out sale of land, securities or sale of building from exempt turnover.
The question mentions them as a side detail and they look like non-supplies.
Fix: Section 17(3) includes transactions in securities, sale of land and sale of building (subject to Schedule II para 5(b)) in exempt value. Add them to E. Treat them as part of F as well. Supplies on which you pay tax under reverse charge are not counted as exempt.
Taking the full capital goods credit again each month, or reversing the whole credit in one month.
Confusion between the 5-year life and the actual credit taken.
Fix: Credit is taken in full when the goods are received. Each month you only reverse Te = (E ÷ F) × (Tc ÷ 60).
Applying Rule 43 to capital goods used only for taxable supplies, or only for exempt supplies.
The formula is memorised without the condition for common use.
Fix: Exclusively taxable use gets full credit. Exclusively exempt or non-business use gets no credit. The 60-month method is only for common use.
Reversing the entire invoice credit under Rule 37 when part payment was made, or counting 180 days from the due date.
The rule is remembered as a simple 180-day cut-off.
Fix: Count 180 days from the invoice date. Reverse only the ITC on the unpaid proportion, and add interest. Skip reverse-charge supplies.
Forgetting the annual recomputation under Rule 42 (and for Rule 43 reversals) and the interest on any shortfall.
Students treat the monthly figure as final.
Fix: State that the monthly reversal is provisional and is recomputed for the year, in the September return of the following financial year (or the annual return date if earlier). Any extra reversal is paid with interest under Section 50; any excess may be reclaimed.

Worked examples

Example 1

Siddharth Traders makes taxable supplies and also exempt supplies. For the month, total ITC on inputs and input services (T) is ₹10,00,000. Of this, ₹1,00,000 relates exclusively to exempt supplies, ₹50,000 is blocked under Section 17(5), and ₹4,00,000 relates exclusively to taxable supplies. The rest is common. In the month, exempt supplies are ₹20,00,000 and total turnover in the State is ₹1,00,00,000. Compute the reversal under Rule 42 and the eligible ITC.

Show the solution

T1 = ₹1,00,000 (exclusive exempt). T2 = ₹50,000 (blocked). T3 = ₹4,00,000 (exclusive taxable).
C1 = T − T1 − T2 = 10,00,000 − 1,00,000 − 50,000 = ₹8,50,000.
C2 = C1 − T3 = 8,50,000 − 4,00,000 = ₹4,50,000. This is the common credit.
Ratio E ÷ F = 20,00,000 ÷ 1,00,00,000 = 20%.
D = 20% × 4,50,000 = ₹90,000. This is ineligible and is added to output tax liability.
Eligible ITC = T − T1 − T2 − D = 10,00,000 − 1,00,000 − 50,000 − 90,000 = ₹7,60,000.
Check: T3 + (C2 − D) = 4,00,000 + 3,60,000 = ₹7,60,000. It matches.
The figure is provisional. It is recomputed on annual figures in the return for September of the following financial year (not later than the annual return due date, if earlier), and any shortfall bears interest under Section 50.

Answer: Reversal under Rule 42 is ₹90,000. Eligible ITC for the month is ₹7,60,000, subject to annual recomputation.

Example 2

Mehra Pharma, registered in one State, buys a machine (capital goods) for ₹30,00,000 plus GST at 18%. It is used for both taxable and exempt supplies. In a particular month, exempt supplies are ₹15,00,000 and total turnover is ₹60,00,000. (a) Compute the Rule 43 reversal for that month. (b) Separately, Mehra Pharma receives a service invoice of ₹2,36,000 (₹2,00,000 plus ₹36,000 GST), takes the credit, and by the 180th day has paid only ₹1,18,000. Compute the Rule 37 reversal. The supply is not under reverse charge.

Show the solution

(a) GST on machine = 18% × 30,00,000 = ₹5,40,000. This is Tc, taken in full on receipt because the machine is for common use.
Tm = Tc ÷ 60 = 5,40,000 ÷ 60 = ₹9,000 per month.
E ÷ F = 15,00,000 ÷ 60,00,000 = 25%.
Te = 25% × 9,000 = ₹2,250. This is added to output tax liability for the month. The process repeats each month for 5 years from the invoice date, using that month's ratio. The monthly amounts are later recomputed on annual figures as under Rule 42(2).
(b) The unpaid invoice value is 2,36,000 − 1,18,000 = ₹1,18,000, which is half of the invoice value.
ITC reversal = 36,000 × (1,18,000 ÷ 2,36,000) = ₹18,000.
This amount is added to output tax liability with interest under Section 50 at the prescribed rate. Once the remaining ₹1,18,000 is paid, Mehra Pharma can re-avail the ₹18,000.

Answer: (a) Rule 43 reversal for the month is ₹2,250, subject to annual recomputation. (b) Rule 37 reversal is ₹18,000 plus interest, which can be re-availed on payment.

Exam tips

In written answers, show the T, T1, T2, T3, C1 and C2 chain even if the numbers are simple. Marks are given for each step.
State the provision and condition first. For example, write 'Credit is allowed only to the extent used for taxable supplies under Section 17(2)' and then the working.
In case-scenario MCQs, look for a trap: land sale, securities, building sale or a capital good used only for taxable supplies. Only land, securities and building go into E (and F). A reverse-charge supply is not counted as exempt. There is no negative marking, so always attempt.
For Rule 37, check three things before calculating: invoice date, whether it is reverse charge, and how much was actually paid.
When asked about a full year, mention the annual recomputation and the interest on shortfall. Many students lose marks by stopping at the monthly figure.

Practice questions from Input Tax Credit

Apportionment of Credit and Reversals in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Apportionment of Credit and Reversals: frequently asked questions

What is the difference between Rule 42 and Rule 43?

Rule 42 deals with inputs and input services and apportions the common credit each month using the exempt turnover ratio. Rule 43 deals with capital goods and spreads the credit over a 5-year useful life of 60 months. Under both, the reversed amount is added to output tax liability.

How do I calculate ITC reversal for exempt supplies?

Subtract blocked credit, exclusive exempt or non-business credit and exclusive taxable credit from total ITC to get common credit. Then multiply common credit by exempt turnover divided by total turnover. The result is the amount to reverse.

Does Rule 37 apply to reverse charge supplies?

No. The 180-day payment condition applies to supplies where you are not paying tax under reverse charge. For other supplies, if you do not pay the supplier within 180 days from the invoice date, you reverse the proportionate credit with interest. You can take the credit again after payment.

Is the monthly Rule 42 reversal final?

No. It is provisional. You recompute it on annual figures in the return for September of the following financial year, or by the annual return due date if that is earlier. If the annual reversal is higher, you pay the difference with interest under Section 50. If it is lower, you may reclaim the excess.