GSTAgent›Workflows›Rule 42/43 — ITC Reversal

GST Audit⏱ 10 min

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Rule 42/43 — ITC Reversal

Compute proportionate ITC reversal for mixed supplies. C2 formula auto-applied.

When a business makes both taxable and exempt supplies, ITC on common inputs must be reversed proportionately under Rule 42. Capital goods ITC is reversed under Rule 43. The C2 formula, T1-T4 tagging, and annual September reconciliation are complex — GSTAgent computes them automatically from your Tally data.

Rule 42Rule 43ReversalExempt supply

Start Rule 42/43 Computation →

The Problem

Why this needs to be automated

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C2 formula is complex and error-prone

Rule 42's C2 = (C1 × E/F) formula requires T1 (blocked ITC), T2 (non-business), T3 (other reversals), T4 (eligible), and their correct tagging — an easy place to make errors that attract demands.

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Monthly reversal + annual reconciliation

A provisional reversal is made monthly. In September, the actual exempt turnover for the full year is applied and any difference must be paid with interest — easily forgotten.

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Capital goods on a different schedule

Rule 43 applies to capital goods — ITC is reversed at 5% per quarter of use for the period capital goods are used for exempt supply. Tracked per asset, not aggregate.

Regulatory Context

The law that makes this matter

Rule 42

ITC reversal on inputs/input services

Common ITC (used for both taxable and exempt supplies) must be reversed proportionately. C2 = C1 × (Exempt/Total turnover). Monthly provisional + September annual adjustment.

Rule 43

ITC reversal on capital goods

ITC on capital goods used for exempt supply reversed at 5% per quarter of useful life (assumed 60 months). Computed asset-wise.

Sec 17(2)

Proportionate ITC

Where goods or services are used partly for taxable and partly for exempt supplies, ITC shall be restricted to taxable supply portion.

How It Works

4 steps. Mostly automated.

Tag T1-T4 from Tally

GSTAgent reads Tally data and auto-tags ITC into T1 (blocked), T2 (non-business), T3 (other), T4 (eligible common) based on ledger names and GST categories.

Compute C1, C2, C3

C1 = total common credit. C2 = C1 × (exempt turnover / total turnover). C3 = C1 − C2 = eligible ITC. All computed automatically.

September annual reconciliation

Provisional monthly reversals totalled. Actual annual exempt turnover applied. Difference — excess or short reversal — shown with interest if applicable.

Capital goods Rule 43

For each capital good: quarterly reversal = (original ITC / 60) × quarters in exempt use. Tracked per asset, per quarter.

Sample Output

What you actually see

Sample data — Metro Print Works Pvt. Ltd · FY 2026-27

Total common ITC (C1)

₹2,84,500

Exempt turnover / Total

18% / 82%

C2 — reversal required

₹51,210

C3 — eligible ITC

₹2,33,290

Annual adjustment (Sep)

₹3,840 additional reversal

Capital goods reversal (Rule 43)

₹8,500 per quarter

Sample data for illustration only. Actual results depend on your client's Tally data. Not professional tax advice.

Edge Cases

How GSTAgent handles the tricky ones

Scenario	GSTAgent Output
New business — no exempt supply in early months	C2 = 0 provisionally — annual reconciliation adjusts if exempt supply made later
Capital goods disposed before 5 years	Remaining ITC reversed in month of disposal — Rule 44 applies
Turnover includes zero-rated exports	Zero-rated (exports) treated as taxable — not exempt — correct C2 formula applied

Auto

C1-C3 formula computed

Monthly

Provisional reversal + Sep final

Per asset

Rule 43 capital goods tracked

Manual formula errors

FAQ

Common questions

What turnover is used in the Rule 42 formula?

Exempt supply turnover / Total turnover for the month (or year for annual reconciliation). Exports under LUT are not exempt — they are zero-rated and included in taxable.

When must the September reconciliation be done?

In the GSTR-3B for September of the same financial year. Difference from provisional reversals must be paid with interest if short-reversed.

Does this apply to composition dealers?

Composition dealers cannot claim ITC — Rule 42/43 does not apply.

What is the assumed useful life for capital goods?

The GST law assumes 60 months (5 years) for all capital goods. 5% per quarter reversal applies for quarters of exempt use.

Ready to run this workflow?

A GSTAgent subscription code is required. CA firm plans from ₹1,400/month for 10 clients.

Start Rule 42/43 Computation →View pricing ← All workflows