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Indirect Tax Laws and Practice · Input Tax Credit

Apportionment of ITC and Reversals: Rules 37, 37A, 42, 43

Updated 11 October 2026 · Fact-checked

You can claim input tax credit only on supplies used for taxable business supplies. Where inputs serve both taxable and exempt supplies, you split credit by a turnover ratio (Rule 42; Rule 43 for capital goods). You must also reverse credit if you do not pay the supplier within 180 days (Rule 37), or if the supplier has not filed GSTR-3B (Rule 37A).

Understand Apportionment of Credit and Reversals

ITC is a refund-like set-off of tax paid on purchases against tax on sales. It is meant for taxable business outputs. So credit on inputs used for exempt supplies or non-business purposes is not allowed.

In practice, most purchases are mixed. One rent bill or one raw material may feed both taxable and exempt output. The law handles this by sorting your credit into groups: exclusively taxable, exclusively exempt, non-business, blocked, and common. Only the common group needs apportionment, using the ratio of exempt turnover to total turnover.

Rule 42 covers inputs and input services. Rule 43 covers capital goods, where the credit is spread over the asset's life, taken as five years (60 months), rather than judged in a single month. Check the current rule text for exact symbols and conditions before the exam.

Reversal also happens for payment and filing defaults. Under Rule 37, if you do not pay the supplier within the time limit in the second proviso to section 16(2), which is 180 days from the invoice date, you reverse the credit proportionate to the unpaid amount, with interest under section 50. Under Rule 37A, you reverse credit if the supplier has not filed GSTR-3B for the matching period by a cut-off date. In both cases you can re-avail the credit once the default is cured.

Key rules to remember

Common credit (Rule 42)
Common credit = Total ITC − exclusively exempt − non-business − blocked − exclusively taxable
Only this balance is apportioned. Exclusive exempt, non-business and blocked credit are fully ineligible.
Reversal on common credit (Rule 42)
Reversal = Common credit × (Exempt turnover ÷ Total turnover)
Worked monthly, then adjusted at year end with interest on any shortfall. Check current rule text for the annual adjustment dates.
Capital goods credit (Rule 43)
Monthly credit = Credit on capital goods ÷ 60; exempt part = monthly credit × (Exempt turnover ÷ Total turnover)
Applies to capital goods used for both taxable and exempt supplies. Goods used wholly for exempt supplies get no credit.
Non-payment to supplier (Rule 37)
Reverse ITC proportionate to the unpaid amount, in GSTR-3B for the tax period immediately following the 180 days from invoice date
With interest under section 50. Does not apply to reverse charge supplies. You can re-avail when you pay.
Supplier default (Rule 37A)
Reverse in GSTR-3B on or before 30 November following the financial year of availing, if the supplier had not filed GSTR-3B by 30 September
Applies where the supplier's GSTR-1 shows the invoice but its GSTR-3B is unfiled. If not reversed, it is payable with interest under section 50. Re-avail when the supplier files.

How to solve Apportionment of Credit and Reversals questions

Use this order for any reversal question so you do not miss a category or the wrong ratio.

  1. 1Read the question and note whether it deals with inputs, capital goods, or a payment or filing default.
  2. 2List the total ITC for the period and split it into exclusively taxable, exclusively exempt, non-business, blocked and common credit.
  3. 3Remove the exclusive, non-business and blocked credits first. What remains after the exclusively taxable credit is the common credit.
  4. 4Find the ratio: exempt turnover ÷ total turnover for the same period and state. Use values stated in the question.
  5. 5Multiply the common credit by the ratio to get the reversal. Add the fully ineligible credits for the total reversal.
  6. 6For capital goods, divide the credit by 60 for the monthly amount, then apply the ratio.
  7. 7For Rule 37, count 180 days from the invoice date, reverse only the unpaid proportion, and name the return period and interest.
  8. 8State the eligible ITC and say when the credit can be re-availed.

Quickest way: Subtract, then multiply

When to use it: Use for numerical questions on Rule 42 with a single ratio and a clear list of credits.

  1. Write total ITC and subtract every exclusive and blocked bucket. The balance is common credit.
  2. Compute the ratio as a fraction and simplify it, for example 6 ÷ 24 = 1/4.
  3. Reversal = common credit × fraction.
  4. Eligible ITC = exclusively taxable credit + common credit − reversal.
  5. Cross-check: eligible plus all reversed and ineligible amounts equals total ITC.

Common mistakes in Apportionment of Credit and Reversals

  • Applying the turnover ratio to total ITC instead of only common credit

    Students rush to the ratio and forget to separate exclusive credits.

    Fix: Always carve out exclusive, non-business and blocked credits first and apportion only the common credit.

  • Using exempt turnover ÷ taxable turnover as the ratio

    The word 'exempt' versus 'taxable' suggests a comparison between the two.

    Fix: The denominator is total turnover, including exempt supplies.

  • Reversing the full ITC under Rule 37 when the supplier is paid in part

    Students overlook that the rule reverses credit proportionate to the amount not paid.

    Fix: Compute unpaid ÷ total invoice value (including tax) × tax credit.

  • Applying Rule 37 to reverse charge purchases

    The 180-day rule is remembered without its exclusion.

    Fix: Rule 37 excludes supplies on which tax is payable on reverse charge.

  • Mixing up Rule 37 and Rule 37A

    Both reverse credit and both have time limits.

    Fix: Rule 37 is about your non-payment to the supplier (180 days). Rule 37A is about the supplier's non-filing of GSTR-3B (30 September cut-off, reverse by 30 November).

  • Forgetting that reversed credit can be re-availed

    Students stop at the reversal and give no closing step.

    Fix: State that you may re-avail after paying the supplier (Rule 37) or after the supplier files its return (Rule 37A).

Worked examples

Example 1

Prime Textiles Ltd had total ITC of ₹5,00,000 in a month. Credit exclusively for exempt supplies is ₹60,000, blocked credit is ₹20,000, and credit exclusively for taxable supplies is ₹2,20,000. The rest is common. Exempt turnover is ₹6,00,000 and total turnover is ₹24,00,000. Find the ITC reversal and the eligible ITC.

Show the solution
  1. Common credit = 5,00,000 − 60,000 − 20,000 − 2,20,000 = ₹2,00,000.
  2. Ratio = 6,00,000 ÷ 24,00,000 = 1/4.
  3. Reversal on common credit = 2,00,000 × 1/4 = ₹50,000.
  4. Total credit not available = 60,000 + 20,000 + 50,000 = ₹1,30,000.
  5. Eligible ITC = 5,00,000 − 1,30,000 = ₹3,70,000.
  6. Check: 2,20,000 + (2,00,000 − 50,000) = 3,70,000.

Answer: Reversal on common credit is ₹50,000. Eligible ITC is ₹3,70,000.

Example 2

Sharma Traders bought goods on 10 June 2026 for ₹5,00,000 plus 18% GST and availed the ITC. By the end of the 180-day period it had paid the supplier only ₹2,95,000 (towards value and tax). Compute the ITC to be reversed under Rule 37 and say when.

Show the solution
  1. GST = 18% × 5,00,000 = ₹90,000. Invoice total = ₹5,90,000.
  2. Unpaid amount = 5,90,000 − 2,95,000 = ₹2,95,000, which is half of the invoice.
  3. ITC proportionate to unpaid amount = 90,000 × 2,95,000 ÷ 5,90,000 = ₹45,000.
  4. 180 days from 10 June 2026: 20 days in June, 31 in July, 31 in August, 30 in September, 31 in October, 30 in November, giving 173, plus 7 days in December, ending 7 December 2026.
  5. The reversal goes in GSTR-3B for the tax period immediately following the period of 180 days, that is the January 2027 period, with interest under section 50.
  6. If Sharma Traders later pays the balance, it can re-avail the ₹45,000.

Answer: Reverse ₹45,000 with interest under section 50 in the GSTR-3B for the period immediately following the 180 days. Re-avail on payment.

Exam tips

  • Rule 42 numericals often hide a blocked or non-business credit in the data. Remove it before apportioning.
  • Show the common credit, ratio and reversal on separate lines so partial marks are safe.
  • In MCQs, check whether the question refers to Rule 37 (non-payment by you) or Rule 37A (supplier's GSTR-3B unfiled).
  • For the 180-day count, list the days month by month and name the GSTR-3B period of reversal.
  • Always close with the re-availment position and the interest provision.

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 formula for ITC reversal under Rule 42?

Find the common credit by removing exclusive exempt, non-business, blocked and exclusively taxable credits from total ITC. Reverse common credit × (exempt turnover ÷ total turnover). A year-end adjustment follows under the rule.

How is Rule 43 different from Rule 42?

Rule 42 deals with inputs and input services in the month. Rule 43 deals with capital goods, where credit is spread over five years (60 months) and the exempt portion is worked out from the turnover ratio each month.

What happens if I do not pay my supplier within 180 days?

Under Rule 37 you reverse the ITC proportionate to the unpaid amount, with interest under section 50, in GSTR-3B for the tax period immediately following the 180 days. When you pay, you can re-avail the credit.

What is Rule 37A?

If the supplier has not filed its GSTR-3B by 30 September following the financial year in which you availed the credit, you reverse the credit in GSTR-3B on or before 30 November. If you do not, it is payable with interest. You can re-avail it once the supplier files.